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 December 31, 2021September 30, 2022

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-1373

MODINE MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

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

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

Registrant’s telephone number, including area code (262) 636-1200

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
   
Common Stock, $0.625 par valueMODNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No ☑

The number of shares outstanding of the registrant’s common stock, $0.625 par value, was 51,913,89652,099,388 at JanuaryOctober 28, 2022.

Table of Contents
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.
2724
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
41
35
 
Item 4. Controls and Procedures.
42
35
PART II. OTHER INFORMATION 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
42
36
 
Item 5. Other Information.
43
Item 6. Exhibits.
43
37
SIGNATURE
44
38

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and ninesix months ended December 31,September 30, 2022 and 2021 and 2020
(In millions, except per share amounts)
(Unaudited)

 
Three months ended
December 31,
  
Nine months ended
December 31,
  
Three months ended
September 30,
  
Six months ended
September 30,
 
 2021  2020  2021  2020  2022  2021  2022  2021 
Net sales $502.2  $484.3  $1,475.7  $1,293.5  $578.8  $478.9  $1,119.8  $973.5 
Cost of sales  427.6   401.6   1,261.6
   1,083.9
   482.6   412.6   940.2
   834.0
 
Gross profit  74.6   82.7   214.1
   209.6
   96.2   66.3   179.6
   139.5
 
Selling, general and administrative expenses  50.3   56.1   161.6
   151.6
   58.8   51.9   115.1
   111.3
 
Restructuring expenses  2.1   0.9   3.0
   7.0
   0.6   0.6   2.1
   0.9
 
Impairment charges (reversals) – net  (57.2)  134.4   (55.7)  134.4
 
Impairment charges – net  -  3.3   -  1.5
 
Loss on sale of assets  0   0   6.6
   0   -   -   -
   6.6 
Operating income (loss)
  79.4   (108.7)  98.6   (83.4)
Operating income
  36.8   10.5  62.4   19.2
Interest expense  (3.8)  (4.6)  (11.8)  (15.2)  (4.7)  (3.8)  (8.8)  (8.0)
Other expense – net  (1.1)  (0.5)  (1.6)  (1.0)  (1.4)  (0.7)  (3.7)  (0.5)
Earnings (loss) before income taxes  74.5   (113.8)  85.2   (99.6)
Earnings before income taxes  30.7   6.0  49.9   10.7
Provision for income taxes  (0.1)  (81.6)  (7.4)  (95.3)  (6.4)  (5.4)  (11.3)  (7.3)
Net earnings (loss)
  74.4   (195.4)  77.8   (194.9)
Net earnings attributable to noncontrolling interest  (0.3)  (0.3)  (1.0)  (0.8)
Net earnings (loss) attributable to Modine $74.1  $(195.7) $76.8  $(195.7)
Net earnings
  24.3   0.6  38.6   3.4
Net loss (earnings) attributable to noncontrolling interest  0.1  (0.2)  0.1  (0.7)
Net earnings attributable to Modine $24.4  $0.4 $38.7  $2.7
                                
Net earnings (loss) per share attributable to Modine shareholders:
                
Net earnings per share attributable to Modine shareholders:
                
Basic $1.42  $(3.81) $1.48  $(3.82) $0.47  $0.01 $0.74  $0.05
Diluted $1.41  $(3.81) $1.46  $(3.82) $0.46  $0.01 $0.74  $0.05
                                
Weighted-average shares outstanding:                                
Basic  52.0   51.3   51.9
   51.2
   52.2   52.0   52.2
   51.9
 
Diluted  52.4   51.3   52.5
   51.2
   52.7   52.6   52.5
   52.5
 

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 ninesix months ended December 31,September 30, 2022 and 2021 and 2020
(In millions)
(Unaudited)

 
Three months ended
December 31,
  
Nine months ended
December 31,
 
  2021  2020  2021  2020 
Net earnings (loss)
 $74.4  $(195.4) $77.8  $(194.9)
Other comprehensive income (loss):                
Foreign currency translation  (3.3)  18.4   (6.1)  41.2 
Defined benefit plans, net of income taxes of $0, $0.3, $0, and $1.1 million
  1.6   1.3   6.6
   3.8
 
Cash flow hedges, net of income taxes of $0, $0, $0.1, and $0.5 million
  0.2   0   (0.2)  1.4 
Total other comprehensive income (loss)  (1.5)  19.7   0.3
   46.4 
                 
Comprehensive income (loss)  72.9   (175.7)  78.1   (148.5)
Comprehensive income attributable to noncontrolling interest  (0.4)  (0.7)  (0.9)  (1.4)
Comprehensive income (loss) attributable to Modine $72.5  $(176.4) $77.2  $(149.9)
 
Three months ended
September 30,
  
Six months ended
September 30,
 
  2022  2021  2022  2021 
Net earnings
 $24.3  $0.6  $38.6  $3.4 
Other comprehensive income (loss), net of income taxes:
                
Foreign currency translation  (23.9)  (8.0)  (47.8)  (2.8)
Defined benefit plans
  1.4   1.6   2.7
   5.0
 
Cash flow hedges  -   -   (1.6)  (0.4)
Total other comprehensive income (loss)  (22.5)  (6.4)  (46.7)  1.8 
                 
Comprehensive income (loss)  1.8   (5.8)  (8.1)  5.2 
Comprehensive loss (income) attributable to noncontrolling interest  0.6   0.2   1.0   (0.5)
Comprehensive income (loss) attributable to Modine $2.4  $(5.6) $(7.1) $4.7 

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

2
Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2021September 30, 2022 and March 31, 20212022
(In millions, except per share amounts)
(Unaudited)

 December 31, 2021  March 31, 2021  September 30, 2022  March 31, 2022 
ASSETS            
Cash and cash equivalents $61.1  $37.8  $70.1  $45.2 
Trade accounts receivable – net  309.3   267.9   340.5   367.5 
Inventories  278.1   195.6   293.7   281.2 
Assets held for sale  0   107.6 
Other current assets  53.1   35.9   62.9   63.7 
Total current assets  701.6   644.8   767.2   757.6 
Property, plant and equipment – net  318.1   269.9   291.2   315.4 
Intangible assets – net  93.2   100.6   82.4   90.3 
Goodwill  169.5   170.7   160.9   168.1 
Deferred income taxes  28.9   24.5   23.8   27.2 
Other noncurrent assets  70.1   66.2   66.7   68.4 
Total assets $1,381.4  $1,276.7  $1,392.2  $1,427.0 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Short-term debt $0  $1.4  $14.9  $7.7 
Long-term debt – current portion  21.8   21.9   21.3   21.7 
Accounts payable  295.4   233.9   309.1   325.8 
Accrued compensation and employee benefits  64.2   66.5   86.2   85.1 
Liabilities held for sale  0   103.3 
Other current liabilities  52.7   42.2   55.0   54.2 
Total current liabilities  434.1   469.2   486.5   494.5 
Long-term debt  368.8   311.2   334.4   348.4 
Deferred income taxes  6.0   5.9   4.3   5.9 
Pensions  61.0   58.6   42.7   47.2 
Other noncurrent liabilities  73.9   75.7   73.6   72.9 
Total liabilities  943.8   920.6   941.5   968.9 
Commitments and contingencies (see Note 18)  0   0 
Commitments and contingencies (see Note 17)  
   
 
Shareholders’ equity:                
Preferred stock, $0.025 par value, authorized 16.0 million shares, issued - NaN
  0   0 
Common stock, $0.625 par value, authorized 80.0 million shares, issued 54.6 million and 54.3 million shares
  34.2   33.9 
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 55.1 million and 54.8 million shares
  34.4   34.2 
Additional paid-in capital  260.5   255.0   266.0   261.6 
Retained earnings  336.0   259.2   383.1   344.4 
Accumulated other comprehensive loss  (160.8)  (161.2)  (195.3)  (149.5)
Treasury stock, at cost, 2.8 million and 2.7 million shares
  (39.7)  (38.2)
Treasury stock, at cost, 3.1 million and 2.8 million shares
  (43.3)  (40.0)
Total Modine shareholders’ equity  430.2   348.7   444.9   450.7 
Noncontrolling interest  7.4   7.4   5.8   7.4 
Total equity  437.6   356.1   450.7   458.1 
Total liabilities and equity $1,381.4  $1,276.7  $1,392.2  $1,427.0 

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 ninesix months ended December 31,September 30, 2022 and 2021 and 2020
(In millions)
(Unaudited)

 Nine months ended December 31,  Six months ended September 30, 
 2021  2020  2022  2021 
Cash flows from operating activities:            
Net earnings (loss)
 $77.8  $(194.9)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:        
Net earnings
 $38.6  $3.4 
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:        
Depreciation and amortization  40.4   54.2   27.3   26.6 
Impairment charges (reversals) – net  (55.7)  134.4 
Impairment charges – net  -   1.5 
Loss on sale of assets  6.6   0   -   6.6 
Stock-based compensation expense  4.7   4.2   3.5   3.6 
Deferred income taxes  (4.7)  77.5   (0.5)  (1.7)
Other – net  2.0   4.7   1.8   1.2 
Changes in operating assets and liabilities:                
Trade accounts receivable  5.8   24.5   0.2   12.5 
Inventories  (66.6)  9.9   (30.5)  (54.8)
Accounts payable  24.9   1.1   7.2   4.1 
Other assets and liabilities  (27.8)  30.9   8.5   (22.0)
Net cash provided by operating activities  7.4   146.5 
Net cash provided by (used for) operating activities  56.1   (19.0)
                
Cash flows from investing activities:                
Expenditures for property, plant and equipment  (30.7)  (23.7)  (23.0)  (20.4)
Proceeds from (payments for) disposition of assets  (7.6)  0.7   0.1   (5.2)
Disbursements for loan origination (see Note 1)  (4.7)  0   -   (4.7)
Other – net  1.3   0.6   -   1.3 
Net cash used for investing activities  (41.7)  (22.4)  (22.9)  (29.0)
                
Cash flows from financing activities:                
Borrowings of debt  278.6   12.0   141.1   199.9 
Repayments of debt  (221.9)  (134.5)  (149.9)  (145.6)
Borrowings (repayments) on bank overdraft facilities – net  (5.0)  3.5 
Financing fees paid  (0.2)  (0.8)
Borrowings on bank overdraft facilities – net  9.2   10.5 
Purchases of treasury stock under share repurchase program  (2.6)  - 
Dividend paid to noncontrolling interest  (0.9)  0   (0.6)  (0.9)
Other – net  (0.4)  (0.8)  0.3   (0.2)
Net cash provided by (used for) financing activities  50.2   (120.6)
Net cash (used for) provided by financing activities  (2.5)  63.7 
                
Effect of exchange rate changes on cash  (0.7)  3.6   (5.8)  (0.3)
Net increase in cash, cash equivalents, restricted cash and cash held for sale  15.2   7.1 
Net increase in cash, cash equivalents, and restricted cash
  24.9   15.4 
                
Cash, cash equivalents, restricted cash and cash held for sale – beginning of period  46.1   71.3 
Cash, cash equivalents, restricted cash and cash held for sale – end of period $61.3  $78.4 
Cash, cash equivalents, and restricted cash – beginning of period  45.4   46.1 
Cash, cash equivalents, and restricted cash – end of period $70.3  $61.5 

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

4
Table of Contents
MODINE MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three and ninesix months ended December 31,September 30, 2022 and 2021 and 2020
(In millions)
(Unaudited)

 Common stock  Additional  Retained  Accumulated other  Treasury stock,  Non-controlling     Common stock  Additional paid-in  Retained  
Accumulated
other
comprehensive
  
Treasury
stock, at
  Non- controlling    
 Shares  Amount  paid-in capital  earnings  comprehensive loss  at cost  interest  Total  Shares  Amount  capital  earnings   loss  cost  interest  Total 
Balance, March 31, 2021
  54.3  $33.9  $255.0  $259.2  $(161.2) $(38.2) $7.4  $356.1 
Balance, March 31, 2022
  54.8
  $34.2  $261.6  $344.4  $(149.5) $(40.0) $7.4  $458.1 
Net earnings
  -   0   0   2.3   0   0   0.5   2.8   -
   -
   -
   14.3
   -
   -
   -
   14.3
 
Other comprehensive income  -   0   0   0   8.0   0   0.2   8.2 
Other comprehensive loss
  -
   -
   -
   -
   (23.8)  -
   (0.4)  (24.2)
Stock options and awards  0.2   0.1   0.7   0   0   0   0   0.8   0.1
   0.1
   -
   -
   -
   -
   -
   0.1
 
Purchase of treasury stock  -   0   0   0   0   (1.0)  0   (1.0)  -
   -
   -
   -
   -
   (1.7)  -
   (1.7)
Stock-based compensation expense  -   0   1.2   0   0   0   0   1.2   -
   -
   1.1
   -
   -
   -
   -
   1.1
 
Dividend paid to noncontrolling interest  -   0   0   0   0   0   (0.9)  (0.9)  -
   -
   -
   -
   -
   -
   (0.6)  (0.6)
Balance, June 30, 2021
  54.5  $34.0  $256.9  $261.5  $(153.2) $(39.2) $7.2  $367.2 
Net earnings
  -   0   0   0.4   0   0   0.2   0.6 
Balance, June 30, 2022
  54.9
  $34.3  $262.7  $358.7  $(173.3) $(41.7) $6.4  $447.1 
Net earnings (loss)
  -
   -
   -
   24.4
   -
   -
   (0.1)  24.3
 
Other comprehensive loss
  -   0   0   0   (6.0)  0   (0.4)  (6.4)  -
   -
   -
   -
   (22.0)  -
   (0.5)  (22.5)
Stock options and awards  0   0.1   0.1   0   0   0   0   0.2 
Stock-based compensation expense  -   0   2.4   0   0   0   0   2.4 
Balance, September 30, 2021
  54.5  $34.1  $259.4  $261.9  $(159.2) $(39.2) $7.0  $364.0 
Net earnings
  -   0   0   74.1   0   0   0.3   74.4 
Other comprehensive income (loss)
  -   0   0   0   (1.6)  0   0.1   (1.5)
Stock options and awards  0.1   0.1   0   0   0   0   0   0.1   0.2
   0.1
   0.9
   -
   -
   -
   -
   1.0
 
Purchase of treasury stock  -   0   0   0   0   (0.5)  0   (0.5)  -   -   -   -   -   (1.6)  -   (1.6)
Stock-based compensation expense  -   0   1.1   0   0   0   0   1.1   -
   -
   2.4
   -
   -
   -
   -
   2.4
 
Balance, December 31, 2021
  54.6  $34.2  $260.5  $336.0  $(160.8) $(39.7) $7.4  $437.6 
Balance, September 30, 2022
  55.1
  $34.4  $266.0  $383.1  $(195.3) $(43.3) $5.8  $450.7 

 Common stock  Additional  Retained  Accumulated other  Treasury stock,  Non-controlling     Common stock  
Additional
paid-in
  Retained  
Accumulated
other
comprehensive
  
Treasury
stock, at
  
Non-
controlling
    
 Shares  Amount  paid-in capital  earnings  comprehensive loss  at cost  interest  Total  Shares  Amount  capital  earnings  
loss
   cost  interest  Total 
Balance, March 31, 2020
  53.4  $33.3  $245.1  $469.9  $(223.3) $(37.1) $5.7  $493.6 
Net (loss) earnings
  -   0   0   (8.6)  0   0   0.2   (8.4)
Balance, March 31, 2021
  54.3
  $33.9  $255.0  $259.2  $(161.2) $(38.2) $7.4  $356.1 
Net earnings
  -
   -
   -
   2.3
   -
   -
   0.5
   2.8
 
Other comprehensive income
  -   0   0   0   7.5   0   0.1   7.6   -
   -
   -
   -
   8.0
   -
   0.2
   8.2
 
Stock options and awards  0.3   0.2   (0.2)  0   0   0   0   0   0.2
   0.1
   0.7
   -
   -
   -
   -
   0.8
 
Purchase of treasury stock  -   0   0   0   0   (0.8)  0   (0.8)  -
   -
   -
   -
   -
   (1.0)  -
   (1.0)
Stock-based compensation expense  -   0   0.7   0   0   0   0   0.7   -
   -
   1.2
   -
   -
   -
   -
   1.2
 
Balance, June 30, 2020
  53.7  $33.5  $245.6  $461.3  $(215.8) $(37.9) $6.0  $492.7 
Dividend paid to noncontrolling interest
  -   -   -   -   -   -   (0.9)  (0.9)
Balance, June 30, 2021
  54.5
  $34.0  $256.9  $261.5  $(153.2) $(39.2) $7.2  $367.2 
Net earnings
  -   0
   0
   8.6   0
   0
   0.3
   8.9   -
   -
   -
   0.4
   -
   -
   0.2
   0.6
 
Other comprehensive income
  -   0
   0
   0
   19.0   0
   0.1   19.1 
Other comprehensive loss
  -
   -
   -
   -
   (6.0)  -
   (0.4)  (6.4)
Stock options and awards  0.1   0.1   0   0   0   0   0   0.1   -
   0.1
   0.1
   -
   -
   -
   -
   0.2
 
Stock-based compensation expense  -   0
   1.4
   0
   0
   0
   0
   1.4
   -
   -
   2.4
   -
   -
   -
   -
   2.4
 
Balance, September 30, 2020
  53.8
  $33.6  $247.0  $469.9  $(196.8) $(37.9) $6.4  $522.2 
Net (loss) earnings
  -   0
   0
   (195.7)  0
   0
   0.3
   (195.4)
Other comprehensive income  -   0
   0
   0
   19.3
   0
   0.4
   19.7
 
Stock-based compensation expense  -   0
   2.1
   0
   0
   0
   0
   2.1
 
Balance, December 31, 2020
  53.8
  $33.6  $249.1  $274.2  $(177.5) $(37.9) $7.1  $348.6 
Balance, September 30, 2021
  54.5
  $34.1  $259.4  $261.9  $(159.2) $(39.2) $7.0  $364.0 

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

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

Note 1: General

The accompanying unaudited condensed consolidated financial statements of Modine Manufacturing Company (“Modine” or the “Company”) were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flows required by GAAP for complete financial statements.  The financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods.  Results for the first ninesix months of fiscal 20222023 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, 2021.2.

Disposition of Austrian Air-cooled Automotive Business in Fiscal 2022
On April 30, 2021, the Company sold its air-cooled automotive business in Austria to Schmid Metall GmbH.  As a result of this transaction, the Company recorded a loss of $6.6 million during the first quarter of fiscal 2022, which included the write-off of $1.7 million of net actuarial losses related to the business’sits pension plan.  The Company reported this loss within the loss on sale of assets line on the consolidated statement of operations.  Upon transaction closing, $5.9 million of cash within the business transferred to the buyer.  During the third quarter of fiscal 2022, a purchase price adjustment for net working capital and certain other items was finalized and the Company paid the buyer $2.4 million.  The final purchase price adjustment was consistent with the Company’s prior estimate and no adjustment was required to the $6.6 million loss on sale recorded during the first quarter fiscal 2022. Prior to the disposition, the Company reported the financial results of this business within the Automotive segment.  The air-cooled automotive business’s net sales were $63.0 million in fiscal 2021.

In connection with the sale of the air-cooled automotivethis business, the Company provided the buyer with a 5-year, €4.0 million loan facility.  BorrowingsThe buyer began borrowing under the agreement currently bear interest at 2.6 percent.  Duringthis facility during the second quarter of fiscal 2022. At both September 30, 2022 and March 31, 2022, the Company disbursedrecorded a €4.0 million ($4.7 million) to the buyer under this facility.  The Company recorded the loan receivable within other noncurrent assets on its consolidated balance sheet because the Company expects to receive the principal repayment more than twelve months from the balance sheet date. Borrowings under the loan facility currently bear interest at 3.7 percent.

Liquid-Cooled Automotive Business Held for Sale in Fiscal 2022
The Company previously agreed to sell its liquid-cooled automotive business.  During the first quarter of fiscal 2022, the Company and the prospective buyer modified the transaction perimeter to remove certain manufacturing operations.  U.S. GAAP requires companies to measure asset groups that revert back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell.  As a result, the Company evaluated the long-lived assets of these businesses that no longer met the requirements to be classified as held for sale and reversed $7.4 million of previously-recorded impairment charges during the first quarter of fiscal 2022 to adjust the long-lived assets to their estimated fair value.  This impairment reversal was partially offset by $8.6 million of impairment charges recorded during the first six months of fiscal 2022 related to other automotive assets held for sale.  The Company reported the net $1.2 million impairment charges during the first six months of fiscal 2022 within the impairment charges line on the consolidated statement of operations.

The Company and the prospective buyer subsequently terminated the sale agreement during the third quarter of fiscal 2022. As a result, the liquid-cooled automotive business reverted back to held and used classification and the Company remeasured its long-lived assets during the third quarter of fiscal 2022.

Disposition of Previously-Closed Facility in Fiscal 2022
During the first quarter of fiscal 2022, the Company signed a definitive agreement to sell a previously-closed manufacturing facility in the U.S.  As a result, the Company recorded an impairment charge of $0.3 million within the Commercial and IndustrialClimate Solutions (“CIS”) segment to write down the property to fair value less costs to sell.  During July 2021, the sale was completed and the Company received net cash proceeds of $0.7 million.

Chief Executive Officer (“CEO”) Transition in Fiscal 2021
In August 2020, Thomas A. Burke stepped down from his position as President and CEO. The Board of Directors subsequently conducted a search for his successor and, effective December 1, 2020, appointed Neil D. Brinker as President and CEO.

As a result of Mr. Burke’s departure and in connection with the search for his successor, the Company recorded costs totaling $5.9 million during the first nine months of fiscal 2021.  These costs, which were recorded as selling, general and administrative (“SG&A”) expenses at Corporate, primarily consisted of severance and benefit-related expenses based upon the terms of Mr. Burke’s transition and separation agreement and costs directly associated with the CEO search, partially offset by the impact of Mr. Burke’s forfeited stock-based compensation awards.

6
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 2: Assets Held for Sale

Liquid-cooled Automotive Business
On October 25,2021, the Company announced that it agreed with Dana Incorporated (“Dana”) to terminate an agreement for the sale of the liquid-cooled automotive business.  Both companies had been actively engaged in the regulatory review process in Germany for many months and agreed that it was no longer in the best interest of either party to pursue the sale transaction further.

In connection with the termination of the sale agreement, the Company determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale during the third quarter of fiscal 2022.  As a result, the Company remeasured the long-lived assets reverting back to held and used classification at the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value at the date of the decision not to sell.  These long-lived assets consisted primarily of property, plant and equipment assets and were fully impaired while classified as held for sale.

During the third quarter of fiscal 2022, the Company reversed $57.2 million of held for sale impairment charges based on the remeasurement of the long-lived assets of the liquid-cooled automotive business.  The Company engaged third-party valuation specialists to assist in estimating the fair values of the assets.  The Company primarily used the market and cost valuation approaches and utilized third-party information from various industry-accepted sources, including applicable government-published statistics and data from appraisal and resale service providers.  The market approach focused on prices for comparable assets in arm’s length transactions.  For land and building assets, for example, sales of similar properties near the Company’s facilities were analyzed.  For machinery and equipment assets, the Company referenced available third-party information regarding the selling prices of similar equipment.  The cost approach focused on the amount for which an asset could be replaced or reproduced.  The cost of an asset was then adjusted downward based on various factors including, but not limited to, age, location, and physical condition.  After estimating the fair values of the assets reverting back to held and used classification, the Company compared the fair value for each asset to its carrying value.  Carrying value represented each asset’s carrying value before the initial impairment charge, reduced for depreciation that would have been recorded if the asset had not been classified as held for sale.  The Company then adjusted each asset to the lower of fair value or carrying value, resulting in the reversal of $57.2 million of previous impairment charges.  In addition, the Company resumed depreciating the property, plant and equipment assets of the liquid-cooled automotive business based on the remeasured asset values during the third quarter of fiscal 2022.

On a year-to-date basis, the $57.2 million held for sale impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net held for sale impairment charges recorded during the firstsix months of fiscal 2022.  At both June 30,2021 and September 30,2021, while the liquid-cooled automotive business was held for sale, the Company reassessed its fair value less costs to sell.  As a result of these evaluations, the Company recorded a total of $8.6 million of impairment charges during the first and second quarters of fiscal 2022.  These impairment charges reduced the net carrying value of property, plant and equipment additions during each quarter to 0.  In addition, in connection with a modification of the sale perimeter in the first quarter of fiscal 2022, the Company determined that certain manufacturing operations no longer met the requirements to be classified as held for sale.  As a result, the Company reversed $7.4 million of previous impairment charges to adjust the long-lived assets within the asset groups impacted by the sale perimeter change to their estimated fair value as of June 30,2021.  The Company’s determination of fair value for the long-lived assets within these businesses involved judgement and the use of significant estimates and assumptions, including assumptions regarding future revenue projections and operating profit margins, risk-adjusted discount rates, business trends and market conditions.

The Company’s fair value measurements of the property, plant and equipment assets within the liquid-cooled automotive business are categorized as Level 3 within the fair value hierarchy.  Refer to Note 4 for the definition of a Level 3 fair value measurement.

The liquid-cooled automotive business was initially classified as held for sale during the third quarter of fiscal 2021.  At that time, the Company recorded $134.4 million of impairment charges primarily related to the long-lived assets within the liquid-cooled automotive business.  Upon classification as held for sale, the Company assessed the disposal group’s fair value less costs to sell and reduced the net carrying value of the disposal group’s long-lived assets to 0.

The Company reported all impairment charges and reversals during fiscal 2021 and 2022 within the impairment charges (reversals) line on the consolidated statements of operations.

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Assets and Liabilities Held for Sale
As of March 31,2021, the Company presented the assets and liabilities of the liquid- and air-cooled automotive businesses as held for sale.  See Note 1 for additional information regarding the sale of the air-cooled automotive business, which was completed on April 30,2021.

The major classes of assets and liabilities held for sale at March 31, 2021 were as follows:

ASSETS   
Cash and cash equivalents $8.0 
Trade accounts receivable – net  54.4 
Inventories  24.7 
Other current assets  12.8 
Property, plant and equipment – net  164.0 
Other noncurrent assets  8.8 
Impairment of carrying value  (165.1)
Total assets held for sale $107.6 
     
LIABILITIES    
Short-term debt $5.0 
Accounts payable  46.3 
Accrued compensation and employee benefits  15.5 
Other current liabilities  12.2 
Pensions  17.8 
Other noncurrent liabilities  6.5 
Total liabilities held for sale $103.3 

Note 3:2: Revenue Recognition

Effective April 1, 2022, the Company began managing its operations under two operating segments, Climate Solutions and Performance Technologies.  The Climate Solutions segment includes the previously-reported Building HVAC Systems (“BHVAC”) and the Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment (“HDE”) and Automotive segments and the CIS Coatings business.  See Note 19 for additional segment financial information.



The Company’s operating segments and their principal revenue-generating activities are as follows:



Climate Solutions

The Climate Solutions segment provides energy-efficient, climate-controlled components and solutions for a wide array of applications.  The Climate Solutions segment principally generates revenue from selling heat transfer products, heating, ventilating, air conditioning, and refrigeration (“HVAC & refrigeration”) products, and data center cooling solutions.  Heat transfer products include heat transfer coils used in commercial and residential HVAC and refrigeration applications.  HVAC and refrigeration products include commercial and residential unit heaters, vertical and horizontal unit ventilators, air conditioning chillers, low global warming potential unit coolers, air-cooled condensers, and dry coolers.  Data center cooling solutions, which are integrated with system controls, include air- and liquid-cooled chillers, computer room air conditioner and air handler units, and fan walls.



Performance Technologies

The Performance Technologies segment provides products and solutions that enhance the performance of customer applications.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  Air-cooled products include radiators, charge air coolers, condensers, and engine cooling modules.  Liquid-cooled products include engine oil coolers, charge air coolers, condensers, and exhaust gas recirculation coolers.  In addition, the Performance Technologies segment provides advanced solutions, which are designed to improve battery range and vehicle life, to zero-emission and hybrid commercial vehicle and automotive customers.  These solutions include battery thermal management systems, electronics cooling packages, and battery chillers.  The advanced solutions provided by the segment also include coating products and application services that extend the life of equipment and components by protecting against corrosion.


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Table of Contents
Disaggregation of Revenue
The table below presents revenue for each of the Company’s business segments, Building HVAC Systems (“BHVAC”), CIS, Heavy Duty Equipment (“HDE”) and Automotive.operating segments.  Each segment’s revenue is disaggregated by primary end market,product group, by geographic location and based upon the timing of revenue recognition and includes inter-segment sales.

Effective July 1, 2021, the Company aligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment; see Note 20 for additional information regarding the Company’s operating segments.  In connection with this segment realignment, the Company also reassessed end market classifications within the impacted businesses.recognition.  The primary end marketdisaggregated revenue information presented in the tablestable below for fiscal 20212022 has been recast to conform tobe comparable with the Company’s new classifications for its end markets.fiscal 2023 presentation.

  
Three months ended September 30, 2022
  
Three months ended September 30, 2021
 

 
Climate
Solutions
  
Performance
Technologies
  
Segment
Total
  
Climate
Solutions
  
Performance
Technologies
  
Segment
Total
 
Product groups:                  
Heat transfer
 $134.9  $-  $134.9  $119.2  $-  $119.2 
HVAC & refrigeration  89.6   -   89.6   80.5   -   80.5 
Data center cooling  31.3   -   31.3   17.3   -   17.3 
Air-cooled  -   169.3   169.3   -   136.2   136.2 
Liquid-cooled
  -   119.0   119.0   -   97.1   97.1 
Advanced solutions
  -   34.7   34.7   -   28.6   28.6 
Inter-segment sales
  0.1   7.0   7.1   0.2   8.9   9.1 
Net sales $255.9  $330.0  $585.9  $217.2  $270.8  $488.0 
                         
Geographic location:                        
Americas $156.3  $182.8  $339.1  $117.9  $144.5  $262.4 
Europe  90.9   91.3   182.2   89.8   80.3   170.1 
Asia  8.7   55.9   64.6   9.5   46.0   55.5 
Net sales $255.9  $330.0  $585.9  $217.2  $270.8  $488.0 
                         
Timing of revenue recognition:                        
Products transferred at a point in time $243.0  $309.8  $552.8  $213.9  $250.5  $464.4 
Products transferred over time  12.9   20.2   33.1   3.3   20.3   23.6 
Net sales $255.9  $330.0  $585.9  $217.2  $270.8  $488.0 

  
Six months ended September 30, 2022
  
Six months ended September 30, 2021
 

 
Climate
Solutions
  
Performance
Technologies
  
Segment
Total
  
Climate
Solutions
  
Performance
Technologies
  
Segment
Total
 
Product groups:                  
Heat transfer $275.4  $-  $275.4  $236.9  $-  $236.9 
HVAC & refrigeration  167.8   -   167.8   151.1   -   151.1 
Data center cooling  56.8   -   56.8   35.5   -   35.5 
Air-cooled  -   322.3   322.3   -   277.7   277.7 
Liquid-cooled  -   229.9   229.9   -   215.8   215.8 
Advanced solutions  -   67.6   67.6   -   56.5   56.5 
Inter-segment sales  0.3   14.5   14.8   0.2   17.9   18.1 
Net sales $500.3  $634.3  $1,134.6  $423.7  $567.9  $991.6 
                         
Geographic location:                        
Americas $295.7  $347.1  $642.8  $221.9  $282.8  $504.7 
Europe  189.9   187.4   377.3   185.8   184.7   370.5 
Asia  14.7   99.8   114.5   16.0   100.4   116.4 
Net sales $500.3  $634.3  $1,134.6  $423.7  $567.9  $991.6 
                         
Timing of revenue recognition:                        
Products transferred at a point in time $473.8  $591.6  $1,065.4  $417.3  $528.1  $945.4 
Products transferred over time  26.5   42.7   69.2   6.4   39.8   46.2 
Net sales $500.3  $634.3  $1,134.6  $423.7  $567.9  $991.6 

8
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
 Three months ended December 31, 2021  Three months ended December 31, 2020 
  BHVAC  CIS
  HDE  Automotive  
Segment
Total
  BHVAC
  CIS
  HDE  Automotive  
Segment
Total
 
Primary end market:                              
Commercial HVAC&R $66.1  $129.6  $0  $0  $195.7  $60.9  $105.1  $0  $0  $166.0 
Data center cooling  24.2   0   0   0   24.2   12.6   0   0   0   12.6 
Industrial cooling  0   16.9   0   0   16.9   0   17.5   0   0   17.5 
Commercial vehicle  0   0   77.7   3.1   80.8   0   0   67.0   5.5   72.5 
Off-highway  0   0   80.6   1.1   81.7   0   0   68.3   0.8   69.1 
Automotive and light vehicle  0   0   21.1   66.7   87.8   0   0   28.8   105.4   134.2 
Other  0.3   2.1   21.4   1.5   25.3   0.2   2.3   21.5   2.2   26.2 
Net sales $90.6  $148.6  $200.8  $72.4  $512.4  $73.7  $124.9  $185.6  $113.9  $498.1 
                                         
Geographic location:                                        
Americas $55.0  $79.4  $124.7  $8.0  $267.1  $45.0  $66.8  $107.9  $14.8  $234.5 
Europe  35.6   63.1   36.2   49.2   184.1   28.7   47.9   35.0   80.9   192.5 
Asia  0   6.1   39.9   15.2   61.2   0   10.2   42.7   18.2   71.1 
Net sales $90.6  $148.6  $200.8  $72.4  $512.4  $73.7  $124.9  $185.6  $113.9  $498.1 
                                         
Timing of revenue recognition:                                        
Products transferred at a point in time $86.6  $138.6  $192.2  $72.4  $489.8  $73.3  $115.8  $177.6  $113.9  $480.6 
Products transferred over time  4.0   10.0   8.6   0   22.6   0.4   9.1   8.0   0   17.5 
Net sales $90.6  $148.6  $200.8  $72.4  $512.4  $73.7  $124.9  $185.6  $113.9  $498.1 

 Nine months ended December 31, 2021  Nine months ended December 31, 2020 
  BHVAC  CIS
  HDE  Automotive  
Segment
Total
  BHVAC
  CIS
  HDE  Automotive  
Segment
Total
 
Primary end market:                              
Commercial HVAC&R $173.4  $396.5  $0  $0  $569.9  $148.9  $309.0  $0  $0  $457.9 
Data center cooling  59.7   0   0   0   59.7   46.7   0   0   0   46.7 
Industrial cooling  0   50.9   0   0   50.9   0   53.2   0   0   53.2 
Commercial vehicle  0   0   233.8   10.8   244.6   0   0   174.8   11.4   186.2 
Off-highway  0   0   237.5   3.5   241.0   0   0   179.8   2.3   182.1 
Automotive and light vehicle  0   0   61.9   205.6   267.5   0   0   69.8   257.4   327.2 
Other  1.6   8.8   65.2   4.1   79.7   0.7   7.4   50.3   14.8   73.2 
Net sales $234.7  $456.2  $598.4  $224.0  $1,513.3  $196.3  $369.6  $474.7  $285.9  $1,326.5 
                                         
Geographic location:                                        
Americas $131.6  $244.7  $371.0  $25.0  $772.3  $109.5  $194.8  $274.4  $39.2  $617.9 
Europe  103.1   189.4   112.8   158.1   563.4   86.8   139.4   91.2   195.9   513.3 
Asia  0   22.1   114.6   40.9   177.6   0   35.4   109.1   50.8   195.3 
Net sales $234.7  $456.2  $598.4  $224.0  $1,513.3  $196.3  $369.6  $474.7  $285.9  $1,326.5 
                                         
Timing of revenue recognition:                                        
Products transferred at a point in time $226.0  $421.8  $572.7  $224.0  $1,444.5  $190.6  $341.4  $456.3  $285.9  $1,274.2 
Products transferred over time  8.7   34.4   25.7   0   68.8   5.7   28.2   18.4   0   52.3 
Net sales $234.7  $456.2  $598.4  $224.0  $1,513.3  $196.3  $369.6  $474.7  $285.9  $1,326.5 

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Table of Contents
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:

 December 31, 2021  March 31, 2021 
Contract assets $18.0  $5.7 
Contract liabilities  9.9   5.6 

At March 31, 2021, $7.1 million and $2.9 million of contract assets and contract liabilities, respectively, were classified as held for sale and excluded from the amounts above.  See Note 2 for additional information.
 September 30, 2022  March 31, 2022 
Contract assets $25.1  $26.8 
Contract liabilities  14.6   11.8 

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 $12.3$1.7 million increasedecrease in contract assets during the first ninesix months of fiscal 20222023 primarily resulted from the reclassification of contract assets previously held for sale and an increasea decrease 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 $4.3$2.8 million increase in contract liabilities during the first ninesix months of fiscal 20222023 primarily resulted from the reclassification of contract liabilities previously held for sale and payments received in advance of the Company’s satisfaction of performance obligations.

Note 4:3: 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.  In addition, the Company assesses the fair value of a disposal group for each reporting period it is held for sale.  See Note 2 for additional information regarding assets held for sale.  The fair value of the Company’s long-term debt is disclosed in Note 1716.

The Company holds investments in deferred compensation trusts to fund obligations under certain non-qualified deferred compensation plans.  The Company records the fair value of these investments within other noncurrent assets on its consolidated balance sheets.  The Company classifies money market investments held by the trusts within Level 2 of the valuation hierarchy.  The Company classifies all other investments held by the trusts within Level 1 of the valuation hierarchy, as it uses quoted market prices to determine the investments’ fair value.  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.  At December 31, 2021 and March 31, 2021, the fair values of the investments and obligations for the Company’s deferred compensation plans each totaled $3.0 million and $2.8 million, respectively.

10
9
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 5:4: Pensions

Pension cost included the following components:

 
Three months ended
December 31,
  
Nine months ended
December 31,
  
Three months ended
September 30,
  
Six months ended
September 30,
 
 2021  2020  2021  2020  2022
  2021
  2022
  2021
 
Service cost $0.1  $0.1  $0.2  $0.3  $-  $-  $0.1  $0.1 
Interest cost  1.8   2.0   5.5   5.9   2.0   1.9   4.0   3.7 
Expected return on plan assets  (3.2)  (2.9)  (9.6)  (8.6)  (2.9)  (3.2)  (5.8)  (6.4)
Amortization of unrecognized net loss  1.7   1.7   5.1   5.2   1.5   1.7   2.9   3.4 
Net periodic benefit cost $0.4  $0.9  $1.2  $2.8  $0.6  $0.4  $1.2  $0.8 

DuringThe Company’s funding policy is to contribute annually, at a minimum, the nine months ended December 31,amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations. In connection with funding relief provisions within the American Rescue Plan Act of 2021, the Company contributed $3.5 million does not expect to make cash contributions to its U.S. pension plans. during fiscal 2023.

Note 6:5: Stock-Based Compensation

The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) 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 $1.1 million and $2.1$2.4 million for each of the three months ended December 31, 2021September 30, 2022 and 2020, respectively.2021. The Company recognized stock-based compensation expense of $4.7$3.5 million and $4.2$3.6 million for the ninesix months ended December 31,September 30, 2022 and 2021, and 2020, respectively.

The fair value of stock-based compensation awards granted during the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 were as follows:

 Nine months ended December 31,
    Six months ended September 30,
 
 2021  2020  2022  2021 

 Shares  
Fair Value
Per Award
  Shares 
Fair Value
Per Award
  Shares  
Fair Value
Per Award
  Shares 
Fair Value
Per Award
 
Stock options  0.2  $8.79   0.4  $3.46   0.2  $6.97   0.2  $8.98 
Restricted stock awards  0.3  $14.96   0.6  $8.34   0.4  $12.51   0.3  $15.97 
Unrestricted stock awards  0.1  $15.93   0.2  $5.21   -   -   0.1  $
15.93 

In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants during the first ninesix months of fiscal 2022.2023. The performance metrics for the cash awards are based upon a target three-year average cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the three-yearperformance period ending March 31, 2024.2025.

11
10
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
The Company used the following assumptions in determining fair value for stock options:

 Nine months ended December 31,
  Six months ended September 30,
 
 2021
 2020  2022
 2021 
Expected life of awards in years  6.1 6.1   6.0 6.1 
Risk-free interest rate  1.1% 0.4%  3.0% 1.0%
Expected volatility of the Company’s stock  56.5% 54.1%  57.8% 56.4%
Expected dividend yield on the Company’s stock  0.0% 0.0%  0.0% 0.0%

As of December 31, 2021,September 30, 2022, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be amortizedrecognized as expense over the remaining service periods, was as follows:


 
Unrecognized
Compensation
Expense
  
Weighted-Average
Remaining Service
Period in Years
  
Unrecognized
Compensation
Expense
  
Weighted-Average
Remaining Service
Period in Years
 
Stock options $2.4   2.9  $2.9   2.5 
Restricted stock awards  7.2   2.5   6.7   2.3 
Performance stock awards  0.1   0.3 
Total $9.7   2.6  $9.6   2.4 

Note 7:6: Restructuring Activities

During
During the first ninesix months of fiscal 2023, restructuring and repositioning expenses primarily consisted of severance expenses related to targeted headcount reductions in Europe within the Performance Technologies segment.  In addition, the Company incurred equipment transfer costs and closure costs related to a previously-leased facility in the Performance Technologies and Climate Solutions segments, respectively.



During the first six months of fiscal 2022, restructuring and repositioning expenses primarily consisted of severance-related costs associated with targeted headcount reductions in the CIS and Automotive segments and equipment transfer costs within the HDE segment.

During the first nine months of fiscal 2021, the Company recorded $3.1 million of severancePerformance Technologies segment and severance-related expenses related to plant consolidation activities in China within the CIS segment.  The Company also implemented targeted headcount reductions in the HDEPerformance Technologies and CIS segments.Climate Solutions segments.

Restructuring and repositioning expenses were as follows:

 
Three months ended
December 31,
  
Nine months ended
December 31,
  
Three months ended
September 30,
  
Six months ended
September 30,
 
 2021  2020  2021  2020  2022  2021  2022  2021 
Employee severance and related benefits $1.4  $0.5  $1.7  $6.2  $-  $0.2  $1.4  $0.3 
Other restructuring and repositioning expenses  0.7   0.4   1.3   0.8   0.6   0.4   0.7   0.6 
Total $2.1  $0.9  $3.0  $7.0  $0.6  $0.6  $2.1  $0.9 

Other restructuring and repositioning expenses primarily consist of equipment transferstransfer and plant consolidation costs.

12
11
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
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 December 31,  Three months ended September 30, 
 2021  2020  2022  2021 
Beginning balance $2.8  $5.8  $17.4  $2.9 
Additions  1.4   0.5   -   0.2 
Payments  (0.9)  (2.5)  (3.4)  (0.1)
Reclassified from (to) held for sale
  0.4   (0.8)
Effect of exchange rate changes  (0.1)  0.2   (1.1)  (0.2)
Ending balance $3.6  $3.2  $12.9  $2.8 

 Nine months ended December 31,  Six months ended September 30, 
 2021
  2020
  2022
  2021
 
Beginning balance $4.0  $5.0  $20.2  $4.0 
Additions  1.7
   6.2
   1.4
   0.3
 
Payments  (2.3)  (7.7)  (6.7)  (1.4)
Reclassified from (to) held for sale
  0.4   (0.8)
Effect of exchange rate changes  (0.2)  0.5
   (2.0)  (0.1)
Ending balance $3.6  $3.2  $12.9  $2.8 

Note 8:7: Other Income and Expense

Other income and expense consisted of the following:

 
Three months ended
December 31,
  
Nine months ended
December 31,
  
Three months ended
September 30,
  
Six months ended
September 30,
 
 2021  2020  2021  2020  2022  2021  2022  2021 
Interest income $0.2  $0.1  $0.3  $0.4  $0.3  $0.1  $0.4  $0.1 
Foreign currency transactions (a)  (1.0)  0.2   (1.1)  0.9   (1.1)  (0.5)  (3.1)  (0.1)
Net periodic benefit cost (b)  (0.3)  (0.8)  (0.8)  (2.3)  (0.6)  (0.3)  (1.0)  (0.5)
Total other expense – net
 $(1.1) $(0.5) $(1.6) $(1.0) $(1.4) $(0.7) $(3.7) $(0.5)

(a)
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.
contracts.

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

13
12
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 9:8: Income Taxes

The Company’s effective tax rate for the three months ended December 31,September 30, 2022 and 2021 and 2020 was0.120.8 percent and (71.7)90.0 percent, respectively. The Company’s effective tax rate for the ninesix months ended December 31,September 30, 2022 and 2021 and 2020 was 8.722.6 percent and (95.7)68.2 percent, respectivelyrespectively. .

The effective tax rates for fiscal 2023 are lower than the prior year, primarily due to changes in the fiscal 2021mix and 2022 periods were significantly impacted by the Company’s accountingamount of foreign and U.S. earnings. The effective tax rate for the liquid-cooled automotive business.  During the third quarter of fiscal 2021, the Company initially classified its liquid-cooled automotive business as held for sale and recorded $134.4 million of impairment charges.  The income tax benefits associated with these impairment charges totaled $37.7 million and increased the deferred tax assets in the applicable jurisdictions.  Upon evaluating the deferred tax assets for realizability, the Company recorded income tax charges totaling $109.9 million related to valuation allowances in the third quarter of fiscal 2021.  In fiscal 2022, the Company recorded net impairment reversals totaling $56.0 million related to this business, primarily driven by the remeasurement of its property, plant and equipment assets upon reverting back to held and used classification during the third quarter of fiscal 2022.  In addition, the effective tax rates for the third quarter and the first ninesix months of fiscal 2022 werewas favorably impacted by $8.2 a net $3.2 million and $11.4 million, respectively, from income tax benefitsbenefit related to valuation allowances on deferred tax assets in foreign jurisdictions, as further described below.  See Note 2 for additional information regarding the impairment charges and reversals related to the liquid-cooled automotive business. jurisdictions.

The Company records valuation allowances against its net deferred tax assets to the extent it determines it is more likely than not that such assets will not be realized in the future. Each quarter, the Company evaluates the probability that its deferred tax assets will be realized and determines whether valuation allowances or adjustments thereto are needed. This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies. In addition, the Company considers the duration of statutory carryforward periods and historical financial results.

Based upon its quarterly analyses in fiscal 2022, the Company determined it was more likely than not that the deferred tax assets in certain foreign jurisdictions will be realized.  As a result, the need for the valuation allowances recorded thereon was eliminated and the Company recorded income tax benefits of $4.8 million and $8.2 million during the first and third quarters of fiscal 2022, respectively.  The Company’s analyses in these quarters included consideration of the transaction perimeter modification during the first quarter and the termination of the sale agreement during the third quarter for the liquid-cooled automotive business and the related impairment reversals.  Based upon its analysis as of SeptemberJune 30, 2021, the Company recorded an income tax charge of $1.6 million in the second quarter of fiscal 2022 since it determined it was more likely than not that the deferred tax assets in a foreign jurisdiction wouldwill be realized.  As a result, the need for the valuation allowance recorded thereon was eliminated and the Company recorded an income tax benefit of $4.8 million during the first quarter of fiscal 2022. The Company’s analysis included consideration of the transaction perimeter modification for the liquid-cooled automotive business and the related impairment reversal; see Note 1 for additional information. Based upon the Company’s analysis as of September 30, 2021, the Company determined it was more likely than not that the deferred tax assets in a foreign jurisdiction will not be realized.  ThisAs a result, the Company recorded an income tax charge partially offsetof $1.6 million in the $13.0 millionsecond quarter of income tax benefits recorded during the first and third quarters.  Together,fiscal 2022.  Combined, these fiscal 2022 valuation allowance adjustments resulted in a net income tax benefit of $11.4$3.2 million during the first ninesix months of fiscal 2022.

Based upon its quarterly analyses for the first three quarters of fiscal 2021, the Company determined it was more likely than not that deferred tax assets in the U.S. and in certain foreign jurisdictions would not be realized and, as a result, recorded income tax charges of $6.6 million and $109.9 million during the second and third quarters of fiscal 2021, respectively.  These fiscal 2021 valuation allowance adjustments resulted in income tax charges totaling $116.5 million during the first nine months of fiscal 2021.

As of December 31, 2021,At September 30, 2022, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $90.181.7 million and $21.925.1  million,, respectively.  These totals include the valuation allowances recorded for certain net deferred tax assets of the liquid-cooled automotive business which was previously classified as held for sale. The Company will maintain the valuation allowances in each applicable tax jurisdiction until it determines it is more likely than not the deferred tax assets will be realized, thereby eliminating the need for a valuation allowance.  Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of the Company’s operations in certain foreign jurisdictions, could necessitate the establishment of further valuation allowances.allowances. At present, the Company has recorded a full valuation allowance on its U.S. deferred tax assets.  Based upon current and anticipated future earnings in the U.S., the Company believes it is reasonably possible that in late fiscal 2023 or in fiscal 2024, sufficient positive evidence may be available to conclude that a significant portion of the U.S. valuation allowance is not needed. The Company estimates such valuation allowance release, if it were to occur, would result in a decrease to income tax expense of up to $70.0 million in the period recorded.  However, if a release of the valuation allowance does occur, the ultimate timing and amount could differ from the Company’s current estimates.

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 the U.S. and 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 2022.2023.

14
13
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 109: Earnings Per Share

The components of basic and diluted earnings per share were as follows:

 
Three months ended
December 31,
  
Nine months ended
December 31,
 
  2021  2020  2021  2020 
Net earnings (loss) attributable to Modine $74.1  $(195.7) $76.8  $(195.7)
                 
Weighted-average shares outstanding - basic  52.0   51.3   51.9   51.2 
Effect of dilutive securities  0.4   0   0.6   0 
Weighted-average shares outstanding - diluted  52.4   51.3   52.5   51.2 
                 
Earnings (loss) per share:                
Net earnings (loss) per share - basic $1.42  $(3.81) $1.48  $(3.82)
Net earnings (loss) per share - diluted $1.41  $(3.81) $1.46  $(3.82)
 
Three months ended
September 30,
  
Six months ended
September 30,
 
  2022  2021  2022  2021 
Net earnings attributable to Modine $24.4  $0.4 $38.7  $2.7
                 
Weighted-average shares outstanding - basic  52.2   52.0   52.2   51.9 
Effect of dilutive securities  0.5   0.6   0.3   0.6 
Weighted-average shares outstanding - diluted  52.7   52.6   52.5   52.5 
                 
Earnings per share:                
Net earnings per share - basic $0.47  $0.01 $0.74  $0.05
Net earnings per share - diluted $0.46  $0.01 $0.74  $0.05

For both the three and ninesix months ended December 31, 2021,September 30, 2022, the calculation of diluted earnings per share excluded 0.60.7 million and 0.20.1 million stock options and restricted stock awards, respectively, because they were anti-dilutive.

For both the three and ninesix months ended December 31, 2020,September 30, 2021, the calculation of diluted earnings per share excluded1.4 0.6 million and 1.50.2 million stock options respectively, because they were anti-dilutive.  In addition, the calculation for the three and nine months ended December 31, 2020 excluded 0.5 million and 0.6 million restricted stock awards, respectively, because they were anti-dilutive. For the three months and nine months ended December 31, 2020, the total number of potentially-dilutive securities was 0.2 million and 0.1 million, respectively.  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.anti-dilutive.

Note 11:10: Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash consisted of the following:

 December 31, 2021  March 31, 2021 
Cash and cash equivalents $61.1  $37.8 
Restricted cash  0.2   0.1 
Cash and restricted cash held for sale  0   8.2 
Total cash, cash equivalents, restricted cash and cash held for sale $61.3  $46.1 

 September 30, 2022  March 31, 2022 
Cash and cash equivalents $70.1  $45.2 
Restricted cash  0.2   0.2 
Total cash, cash equivalents, and restricted cash
 $70.3  $45.4 

Restricted cash, which is reported within other current assets and other noncurrent assets in the consolidated balance sheets, consists primarily of deposits for contractual guarantees or commitments required for rents, import and export duties, and commercial agreements.

15
14
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 12:11: Inventories

Inventories consisted of the following:

 December 31, 2021  March 31, 2021 
Raw materials $178.2  $117.1 
Work in process  55.3   38.5 
Finished goods  44.6   40.0 
Total inventories $278.1  $195.6 


 September 30, 2022  March 31, 2022 
Raw materials $200.4  $186.7 
Work in process  50.3   55.1 
Finished goods  43.0   39.4 
Total inventories $293.7  $281.2 
Inventories in the table above as of March 31, 2021 exclude amounts classified as held for sale.  See Note 2 for additional information.

Note 13:12: Property, Plant and Equipment

Property, plant and equipment, including depreciable lives, consisted of the following:

 December 31, 2021  March 31, 2021 
Land $17.4  $16.4 
Buildings and improvements (10-40 years)
  266.9   203.5 
Machinery and equipment (3-15 years)
  866.9   623.2 
Office equipment (3-10 years)
  98.1   81.3 
Construction in progress  31.7   19.0 
   1,281.0   943.4 
Less: accumulated depreciation  (962.9)  (673.5)
Net property, plant and equipment $318.1  $269.9 

Property, plant and equipment in the table above as of March 31, 2021 exclude amounts classified as held for sale.  See Note 2 for additional information.
 September 30, 2022  March 31, 2022 
Land $14.9  $16.8 
Buildings and improvements (10-40 years)
  251.5   264.6 
Machinery and equipment (3-15 years)
  820.4   869.4 
Office equipment (3-10 years)
  88.3   96.2 
Construction in progress  36.9   31.2 
   1,212.0   1,278.2 
Less: accumulated depreciation  (920.8)  (962.8)
Net property, plant and equipment $291.2  $315.4 

16
Table of Contents
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 14:13: Goodwill and Intangible Assets

Effective July 1, 2021, the Company aligned the data center businesses previously managed by and reported within the CIS segment under the BHVAC segment; see Note 20 for additional information.  As a result of this segment realignment, the Company reassigned a total of $32.5 million of goodwill from a reporting unit within the CIS segment to the reporting units within the BHVAC segment using the relative fair value approach.  To determine the amount of goodwill to be reassigned, the Company compared the estimated fair values of the businesses transferred to the BHVAC segment with the CIS reporting unit immediately prior to the segment change.  The Company estimated the fair values of the affected businesses based upon the present value of their estimated future cash flows.  The Company’s determination of fair value involved judgment and the use of significant estimates and assumptions, including assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows, risk-adjusted discount rates, business trends and market conditions.
The following table presents a rollforwardroll forward of the carrying value of goodwill from March 31, 20212022 to December 31, 2021.September 30, 2022.  The Company has revisedrecast the March 31, 20212022 goodwill balances to be comparable with the current segment structure.

 BHVAC  CIS  Total 
Goodwill, March 31, 2021
 $47.0  $123.7  $170.7 
Effect of exchange rate changes  (0.7)  (0.5)  (1.2)
Goodwill, December 31, 2021
 $46.3  $123.2  $169.5 

In conjunction with There was no impact to the goodwill reassignment evaluation described above, the Company tested itsunderlying reporting units for potential impairment during the second quarteras a result of fiscal 2022 and concluded that the estimated fair value of each reporting unit exceeded its respective carrying value. 

Although the Company concluded goodwill was not impaired, the Company identified that subsequent to the segment realignment the estimated fair value of the Coils and Coolers reporting unit within the CIS segment exceeded its carrying value by approximately 8.0 percent.  As such, there is a heightened risk of a future impairment charge with respect to the $63.0 million of goodwill recorded in this reporting unit as of December 31, 2021.  In estimating the fair value of the Coils and Coolers reporting unit, the Company calculated the present value of its estimated future cash flows using a discounted cash flow model.  The most significant estimates and assumptions inherent in the discounted cash flow model are forecasted financial results, the terminal growth rate, and the discount rate.  These assumptions are classified as Level 3 inputs.  Refer to Note 4 for the definition of a Level 3 fair value measurement.  The Company utilized its multi-year projections for revenue and operating income margins and considered both historical revenue growth rates and earnings levels as well as its assessment of future market potential and expectations for the future financial performance of the reporting unit.  The Company used a discount rate corresponding to its estimated cost of capital, adjusting for country-specific risks based upon the location of the businesses within the reporting unit.during fiscal 2023.

While the Company believes the assumptions it used in estimating the Coils and Coolers reporting unit’s fair value were appropriate and resulted in a reasonable estimate of its fair value, future events or circumstances could have a negative effect on its estimated fair value and could trigger an impairment charge.  These potential future events or circumstances could include lower than forecasted revenues or earnings, market trends that fall below the Company’s current expectations, actions of key customers or suppliers, or increases in the discount rate.  The Company cannot predict the occurrence of events or changes in circumstances that could adversely affect the reporting unit’s future revenue and operating income margins or increase the discount rate, thereby resulting in an impairment charge which could be material to the Company’s consolidated financial statements.
 
Climate
Solutions
  
Performance
Technologies
  Total 
Goodwill, March 31, 2022
 $108.1  $60.0  $168.1 
Effect of exchange rate changes  (6.8)  (0.4)  (7.2)
Goodwill, September 30, 2022
 $101.3  $59.6  $160.9 

17
15
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Intangible assets consisted of the following:

 December 31, 2021  March 31, 2021  September 30, 2022  March 31, 2022 
 
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Intangible
Assets
  
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Intangible
Assets
  
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Intangible
Assets
  
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Intangible
Assets
 
Customer relationships $61.9  $(19.4) $42.5  $62.8  $(16.9) $45.9  $57.9  $(20.6) $37.3  $61.2  $(20.1) $41.1 
Trade names  51.1   (13.2)  37.9   51.5   (11.4)  40.1   49.3   (14.6)  34.7   50.8   (13.8)  37.0 
Acquired technology  23.5   (10.7)  12.8   23.9   (9.3)  14.6   21.5   (11.1)  10.4   23.1   (10.9)  12.2 
Total intangible assets $136.5  $(43.3) $93.2  $138.2  $(37.6) $100.6  $128.7  $(46.3) $82.4  $135.1  $(44.8) $90.3 

The Company recorded amortization expense of $2.1$2.0 million and $2.2 $2.1 million for the three months ended December 31,September 30, 2022 and 2021, and 2020, respectively. respectively.The Company recorded amortization expense of $6.3$4.0 million and $6.4$4.2 million for the ninesix months ended December 31,September 30, 2022 and 2021, and 2020,respectively. The Company estimates that it will record $2.1approximately $4.0 million of amortization expense during the remainder of fiscal 20222023 and approximately $8.0$8.0 million of annual amortization expense in fiscal 20232024 through 2027.2028.

Note 15:14: Product Warranties

Changes in accrued warranty costs were as follows:

 Three months ended December 31,  Three months ended September 30, 
 2021  2020  2022  2021 
Beginning balance $5.6  $9.0  $6.2  $5.6 
Warranties recorded at time of sale  1.1   1.8   1.9   1.6 
Adjustments to pre-existing warranties  (0.3)  (0.4)  (0.3)  (0.3)
Settlements  (1.1)  (1.1)  (1.3)  (1.3)
Reclassified from (to) held for sale
  1.3   (1.5)
Effect of exchange rate changes  0   0.1   (0.3)  - 
Ending balance $6.6  $7.9  $6.2  $5.6 

 Nine months ended December 31,  Six months ended September 30, 
 2021  2020  2022  2021 
Beginning balance $5.2  $7.9  $6.3  $5.2 
Warranties recorded at time of sale  4.1   4.3   3.3   3.0 
Adjustments to pre-existing warranties  (0.8)  (0.3)  (0.5)  (0.5)
Settlements  (3.2)  (2.8)  (2.4)  (2.1)
Reclassified from (to) held for sale
  1.3   (1.5)
Effect of exchange rate changes  0   0.3   (0.5)  - 
Ending balance $6.6  $7.9  $6.2  $5.6 

18
16
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 16:15: Leases

Lease Assets and Liabilities
The following table provides a summary of leases recorded on the consolidated balance sheets.  The amounts as of March 31,2021 exclude operating lease right of use (“ROU”) assets and liabilities, which each totaled $6.1 million, that were classified as held for sale on the Company’s consolidated balance sheet; see Note 2 for additional information.

  Balance Sheet Location December 31, 2021  March 31, 2021   Balance Sheet Location September 30, 2022  March 31, 2022 
Lease Assets                
Operating lease ROU assets 
Other noncurrent assets
 $52.8  $54.1  
Other noncurrent assets
 $52.3  $52.1 
Finance lease ROU assets (a) 
Property, plant and equipment - net
  8.0   8.3  
Property, plant and equipment – net
  6.9   7.7 
                    
Lease Liabilities                    
Operating lease liabilities 
Other current liabilities
 $12.7  $11.2  
Other current liabilities
 $10.7  $12.7 
Operating lease liabilities 
Other noncurrent liabilities
  41.8   44.8  
Other noncurrent liabilities
  42.9   41.2 
Finance lease liabilities 
Long-term debt - current portion
  0.4   0.4  
Long-term debt – current portion
  0.4   0.4 
Finance lease liabilities 
Long-term debt
  3.0   3.2  Long-term debt
  2.2   2.8 
 (a)
Finance lease ROUright-of-use (“ROU”) assets were recorded net of accumulated amortization, of $2.7which totaled $2.8 million and $2.4 million as of December 31, 2021at both September 30, 2022 and March 31, 2021, respectively.
2022.

Components of Lease Expense
The components of lease expense were as follows:

 
Three months ended
December 31,
  
Nine months ended
December 31,
  
Three months ended
September 30,
  
Six months ended
September 30,
 
 2021  2020  2021  2020  2022  2021  2022  2021 
Operating lease expense (a) $5.2  $4.8  $14.6  $14.9  $5.5  $4.8  $10.8  $9.4 
Finance lease expense:                                
Depreciation of ROU assets  0.1   0.2   0.4   0.4   0.2   0.2   0.3   0.3 
Interest on lease liabilities  0   0   0.1   0.1   0.1
   0.1
   0.1
   0.1
 
Total lease expense $5.3  $5.0  $15.1  $15.4  $5.8  $5.1  $11.2  $9.8 
 (a)
ForFor the three and ninesix months ended December 31,September 30, 2022, operating lease expense included short-term lease expense of $1.5 million and $2.8 million, respectively.  For the three and six months ended September 30, 2021, operating lease expense included short-term lease expense of $1.0million and $2.8 million, respectively.  For the three and nine months ended December 31, 2020, operating lease expense included short-term lease expense of $0.9 million and $2.7$1.8 million, respectively.  Variable lease expense was not significant.significant.

19
17
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 17:16: Indebtedness

Long-termAs of September 30, 2022 and March 31, 2022, long-term debt consisted of the following:

_Fiscal year of maturity December 31, 2021  March 31, 2021 
Fiscal year of
maturity
 September 30, 2022  March 31, 2022 
Term loans2025 $167.9  $178.9 2025 $153.2  $163.7 
Revolving credit facility2025  81.2   4.8 2025  61.1   64.9 
5.9% Senior Notes2029  100.0   100.0 2029  100.0   100.0 
5.8% Senior Notes2027  41.7   50.0 2027  41.7   41.7 
Other (a)   3.4   3.6    2.6   3.2 
   394.2   337.3    358.6   373.5 
Less: current portion   (21.8)  (21.9)   (21.3)  (21.7)
Less: unamortized debt issuance costs   (3.6)  (4.2)   (2.9)  (3.4)
Total long-term debt  $368.8  $311.2   $334.4  $348.4 

(a)
Other long-term debt primarily includes finance lease obligations.obligations.

Long-term debt, including the current portion of long-term debt, matures as follows:

Fiscal Year   
Remainder of 2022 $3.4 
2023  21.8 
Fiscal Year (a)
   
Remainder of 2023 $14.8 
2024  21.8   21.4 
2025  228.6   204.1 
2026  33.8   33.7 
2027 & beyond  84.8 
2027  33.7 
2028 & beyond  50.9 
Total $394.2  $358.6 

(a)
Amounts reflect scheduled maturity payments as of September 30, 2022.  As described below, the Company executed an amended credit agreement in October 2022, which extended the maturity dates for the term loan and revolving credit facilities.

The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $250.0 million revolving credit facility, expiring in June 2024.  In addition, this credit agreement provides for both U.S. dollar- and euro-denominated term loan facilities, and shorter-duration swingline loans.  Borrowings under the revolving credit, swingline and term loan facilities bear interest at a variable rate based upon the applicable reference rate and including a margin percentage dependent upon the Company’s leverage ratio, as described below.  At December 31, 2021,September 30, 2022, the weighted-average interest rates for revolving credit facility borrowings and the term loans were 1.73.8 and 1.84.7 percent, respectively.  Based upon the terms of the credit agreement, the Company classifies borrowings under its revolving credit and swingline facilities as long-term and short-term debt, respectively, on its consolidated balance sheets.

In October 2022, the Company executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified the Company’s then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

20
18
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
At December 31, 2021,September 30, 2022, the Company’s borrowings under its revolving credit facility borrowingsand swingline facilities totaled $81.2$61.1 million and $5.5 million, respectively, and domestic letters of credit totaled $5.7 million, resulting in$5.4 million.  As a result, available borrowingsborrowing capacity under the Company’s revolving credit facility was $178.0 million as of $163.1 million.September 30, 2022.  At March 31,2021, 2022, the Company’s borrowings under its revolving credit and swingline borrowingsfacilities totaled $64.9 million and $7.0 million, respectively.$1.4 million. There were 0 swingline borrowings outstanding as of December 31, 2021.



The Company also maintains credit agreements for its foreign subsidiaries.  There were 0The outstanding short-term borrowings related to these foreign credit agreements totaled $9.4 million and $0.7 million at December 31, 2021. AtSeptember 30, 2022 and March 31, 2021, $5.0 million of outstanding short-term foreign borrowings were classified as held for sale.  See Note 2 for additional information.2022, 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.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, the Company is required to represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on its business, property, or results of operations.

The leverage ratio covenant requires the Company to limit its consolidated indebtedness, less a portion of its cash balances, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).)  The Company 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.  As of December 31, 2021, theThe Company was in compliance with its debt covenants; its leverage ratio and interest coverage ratio were 2.5 and 10.0, respectively.covenants as of September 30, 2022.

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 December 31, 2021September 30, 2022 and March 31, 2021,2022, 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 $146.5$130.6 million and $146.0$138.9 million, respectively.  The fair value of the Company’s long-term debt is categorized as Level 2 within the fair value hierarchy.  Refer to Note 43 for the definition of a Level 2 fair value measurement.

Note 18:17: Risks, Uncertainties, Contingencies and Litigation

COVID-19 Pandemic and Supply Chain Disruptions and Inflationary Market Conditions
The COVID-19 pandemic has broadly impactedMarket and economic dynamics, including the global economy and the Company’s key end markets, which were most severely impacted during the first quarterimpacts of fiscal 2021.  During fiscal 2022, the direct effects on the Company from the COVID-19 pandemic, have lessened.  Although the Company’s manufacturing locations are open and operating, production has been negatively affected at times by employee absences due to COVID-19.

The COVID-19 pandemic and other market and economic dynamics have contributed to global supply chain challenges and inflationary market conditions.  Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these market conditions, particularly driving higher oil and gas prices.  The Company is focused on mitigating the negative impacts of labor shortages, and supply chain challenges which have includedand inflationary market conditions, including rising raw material, energy and logistic pricescosts, as well as delays and shortages in certain purchased commodities and components.  The Company has implemented selling price increases for its products in response to raw material and other price increases and is engaged with suppliers to ensure availability of purchased commodities and components.  In addition, the Company’s Automotive segment has been impacted by lower order volume associated with semiconductor shortages, which have caused lower global automotive production.

At this time, the Company cannot reasonably estimate the full impact of the COVID-that19 pandemic or the ongoing supply chain challenges.  If the Company, its suppliers, or its customers experience prolonged shutdowns orchallenges and other significant business disruptions, it is possible that the Company’s ability to conduct business in the manner related economic and market dynamics will have on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business financial position,, results of operations and cash flows.flows in the future.

21
19
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Environmental
The
The Company has recorded environmental investigation and remediation accruals related to manufacturing facilities in the U.S., one of which the Company currently owns and operates, and a former manufacturing facility in the Netherlands.  These accruals primarily relate to soil and groundwater contamination at facilities where past operations followed practices and procedures that were considered acceptable under then-existing regulations, or where the Company is a successor to the obligations of prior owners, and current laws and regulations require investigative and/or remedial work to ensure sufficient environmental compliance.  In instances where a range of loss can be reasonably estimated for a probable environmental liability, but no amount within the range is a better estimate than any other amount, the Company accrues the minimum of the range.  The Company’s accruals for environmental matters totaled $18.7 $18.3 million and $16.0$18.2 million as of December 31, 2021September 30, 2022 and March 31, 2021,2022, respectively.  During the first quarter of fiscal 2023 and 2022, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $1.0 million and $3.4 million.million, respectively.  As additional information becomes available regarding the environmental matters, the Company will re-assess the liabilities and revise the estimated accruals, if necessary.  While it is possible that the ultimate environmental remediation costs may be in excess of amounts accrued, the Company believes, based upon currently available information, that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on its financial position.  However, these matters are subject to inherent uncertainties, and unfavorable outcomes could occur, including significant monetary damages.

Other Litigation
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits and enforcement proceedings by private parties, governmental agencies and/or others in which claims are asserted against Modine.  The Company believes that any additional loss in excess of amounts already accrued would not have a material effect on the Company’s consolidated balance sheet, results of operations, and cash flows.  In addition, management expects that the liabilities which may ultimately result from such lawsuits or proceedings, if any, would not have a material adverse effect on the Company’s financial position.

22
20
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 19:18: Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows:

 Three months ended December 31, 2021  Nine months ended December 31, 2021  Three months ended September 30, 2022  Six months ended September 30, 2022 
 
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total 
Beginning balance $(33.6) $(125.8) $0.2  $(159.2) $(31.0) $(130.8) $0.6  $(161.2) $(62.6) $(109.8) $(0.9) $(173.3) $(39.1) $(111.1) $0.7  $(149.5)
                                                                
Other comprehensive income (loss) before reclassifications  (3.4)  0   0.4   (3.0)  (6.0)  0   1.1   (4.9)  (23.4)  -   -   (23.4)  (46.9)  -   (1.2)  (48.1)
Reclassifications:                                                                
Amortization of unrecognized net loss (a)  -   1.6   -   1.6   -   4.9   -   4.9   -   1.4   -   1.4   -   2.7   -   2.7 
Unrecognized net pension loss in disposed business (b)  -   0   -   0   -   1.7   -   1.7 
Realized gains - net (c)  -   -   (0.2)  (0.2)  -   -   (1.2)  (1.2)
Realized gains – net (b)  -   -   -   -   -   -   (0.4)  (0.4)
Income taxes  0
   0   0   0   0   0   (0.1)  (0.1)  -
   -   -   -   -   -   -   - 
Total other comprehensive income (loss)
  (3.4)  1.6   0.2   (1.6)  (6.0)  6.6   (0.2)  0.4   (23.4)  1.4   -   (22.0)  (46.9)  2.7   (1.6)  (45.8)
                                                                
Ending balance $(37.0) $(124.2) $0.4  $(160.8) $(37.0) $(124.2) $0.4  $(160.8) $(86.0) $(108.4) $(0.9) $(195.3) $(86.0) $(108.4) $(0.9) $(195.3)

 Three months ended December 31, 2020  Nine months ended December 31, 2020  Three months ended September 30, 2021  Six months ended September 30, 2021 
 
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total  
Foreign
Currency
Translation
  
Defined
Benefit
Plans
  
Cash Flow
Hedges
  Total 
Beginning balance $(38.8) $(158.4) $0.4  $(196.8) $(61.4) $(160.9) $(1.0) $(223.3) $(26.0) $(127.4) $0.2  $(153.2) $(31.0) $(130.8) $0.6  $(161.2)
                                                                
Other comprehensive income before reclassifications  18.0   0   0.4   18.4   40.6   0   1.5   42.1 
Other comprehensive income (loss) before reclassifications  (7.6)  -   0.4   (7.2)  (2.6)  -   0.7   (1.9)
Reclassifications:                                                                
Amortization of unrecognized net loss (a)  -   1.6   -   1.6   -   4.9   -   4.9   -   1.6   -   1.6   -   3.3   -   3.3 
Realized (gains) losses - net (c)  -   -   (0.4)  (0.4)  -   -   0.4   0.4 
Unrecognized net pension loss in disposed business (c)  -   -   -   -   -   1.7   -   1.7 
Realized gains – net (b)  -   -   (0.3)  (0.3)  -   -   (1.0)  (1.0)
Income taxes  0   (0.3)  0   (0.3)  0   (1.1)  (0.5)  (1.6)  -   -   (0.1)  (0.1)  -   -   (0.1)  (0.1)
Total other comprehensive income
  18.0   1.3   0   19.3   40.6   3.8   1.4   45.8 
Total other comprehensive income (loss)
  (7.6)  1.6   -   (6.0)  (2.6)  5.0   (0.4)  2.0 
                                                                
Ending balance $(20.8) $(157.1) $0.4  $(177.5) $(20.8) $(157.1) $0.4  $(177.5) $(33.6) $(125.8) $0.2  $(159.2) $(33.6) $(125.8) $0.2  $(159.2)
 (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 54 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 the air-cooled automotive business in Austria, the Company wrote-offwrote off $1.7 million of net actuarial losses related to the disposed business’sits pension plan as a component of the loss on sale recorded during the first quarter of fiscal 2022.  See Note 1 for additional information.
(c)Amounts represent net gains and losses associated with cash flow hedges that were reclassified to net earnings.

23
21
MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 20:19: Segment Information

Effective JulyApril 1, 2021,2022, the Company alignedbegan managing its operations under two operating segments, Climate Solutions and Performance Technologies.  The Climate Solutions segment includes the data center businesses previously managed bypreviously-reported BHVAC and reported withinCIS segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported HDE and Automotive segments and the CIS segment underCoatings business.  See Note 2 for information regarding the BHVACprimary operating activities of each segment.  The BHVACCompany’s new segment assumed managementstructure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  The Company expects this simplified segment structure will allow it to better focus resources on targeted growth opportunities and allow for an efficient application of the Company’s business in Guadalajara, Spain80/20 principles across all product lines to optimize profit margins and a portion of its business in Grenada, Mississippi. Through this segment realignment, the Company has aligned all of its data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, the Company revised its reporting segments and is reporting the financial results of the transferred businesses within the BHVAC segment, consistent with how the Company’s chief operating decision maker is assessing operating performance and allocating capital resources.cash flow.  The segment realignment had no impact on the HDE and Automotive segments or on the Company’s consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periods has been recast to conform to the current presentation.

The following is a summary of net sales, gross profit and operating income and total assets by segment:

 Three months ended December 31,  Three months ended September 30, 
 2021  2020  2022  2021 
 
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total 
Net sales:                                    
BHVAC $90.3  $0.3  $90.6  $73.5  $0.2  $73.7 
CIS  146.9   1.7   148.6   123.5   1.4   124.9 
HDE  193.3   7.5   200.8   173.7   11.9   185.6 
Automotive  71.7   0.7   72.4   113.6   0.3   113.9 
Climate Solutions
 $
255.8  $
0.1  $
255.9  $
217.0  $
0.2  $
217.2 
Performance Technologies
  323.0   7.0   330.0   261.9   8.9   270.8 
Segment total  502.2   10.2   512.4   484.3   13.8   498.1   578.8   7.1   585.9   478.9   9.1   488.0 
Corporate and eliminations  -   (10.2)  (10.2)  -   (13.8)  (13.8)  -   (7.1)  (7.1)  -   (9.1)  (9.1)
Net sales $
502.2
  $-  $502.2  $
484.3
  $-  $484.3  $
578.8
  $-  $578.8  $
478.9
  $-  $478.9 

 Nine months ended December 31,  Six months ended September 30, 
 2021  2020  2022  2021 
 
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total  
External
Sales
  
Inter-segment
Sales
  Total 
Net sales:                                    
BHVAC $233.1  $1.6  $234.7  $195.6  $0.7  $196.3 
CIS  450.3   5.9   456.2   365.2   4.4   369.6 
HDE  571.0   27.4   598.4   449.6   25.1   474.7 
Automotive  221.3   2.7   224.0   283.1   2.8   285.9 
Climate Solutions $
500.0  $
0.3  $
500.3  $
423.5  $
0.2  $
423.7 
Performance Technologies  619.8   14.5   634.3   550.0   17.9   567.9 
Segment total  1,475.7   37.6   1,513.3   1,293.5   33.0   1,326.5   1,119.8   14.8   1,134.6   973.5   18.1   991.6 
Corporate and eliminations  -   (37.6)  (37.6)  -   (33.0)  (33.0)  -   (14.8)  (14.8)  -   (18.1)  (18.1)
Net sales $
1,475.7
  $-  $1,475.7  $
1,293.5
  $-  $1,293.5  $
1,119.8
  $-  $1,119.8  $
973.5
  $-  $973.5 

24
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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
 Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
  
$’s
 % of sales  
$’s
 % of sales  
$’s
 % of sales  
$’s
 % of sales 
Gross profit:                            
BHVAC $27.4   30.3% $25.4   34.5% $65.2   27.8% $64.5   32.9%
CIS  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
HDE  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Automotive  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Segment total  74.8   14.6%  82.7   16.6%  213.0   14.1%  210.0   15.8%
Corporate and eliminations  (0.2)  0   0   0   1.1   0   (0.4)  0 
Gross profit $74.6   14.9% $82.7   17.1% $214.1   14.5% $209.6   16.2%
 Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
   $’s  % of sales   $’s  % of sales   $’s  % of sales   $’s  % of sales 
Gross profit:                            
Climate Solutions $57.3   22.4% $
35.9   
16.5% $
107.7   
21.5% $
68.5   
16.2%
Performance Technologies  39.2   11.9%  29.5   10.9%  72.2   11.4%  69.7   12.3%
Segment total  96.5   16.5%  65.4   13.4%  179.9   15.9%  138.2   13.9%
Corporate and eliminations  (0.3)  -   0.9   -   (0.3)  -   1.3   - 
Gross profit $96.2   16.6% $66.3   13.8% $179.6   16.0% $139.5   14.3%

 Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
Operating income:            
BHVAC $14.4  $14.9  $30.1  $35.6 
CIS  3.4   (0.7)  16.7   4.4 
HDE  10.3   12.8   25.0   23.6 
Automotive  55.0   (124.9)  53.6   (120.7)
Segment total  83.1   (97.9)  125.4   (57.1)
Corporate and eliminations  (3.7)  (10.8)  (26.8)  (26.3)
Operating income (loss)
 $79.4  $(108.7) $98.6  $(83.4)
 
Three months ended
September 30,
  
Six months ended
September 30,
 
  2022  2021  2022  2021 
Operating income:            
Climate Solutions $
32.7  $13.9  $
59.7  $
24.6 
Performance Technologies  16.3   2.1   23.7   17.8 
Segment total  49.0   16.0  83.4   42.4
Corporate and eliminations  (12.2)  (5.5)  (21.0)  (23.2)
Operating income
 $36.8  $10.5 $62.4  $19.2

 December 31, 2021  March 31, 2021 
Total assets:      
BHVAC $213.6  $181.1 
CIS  520.7   540.1 
HDE  473.7   438.7 
Automotive
  181.6   124.2 
Corporate and eliminations (a)  (8.2)  (7.4)
Total assets $1,381.4  $1,276.7 
The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:

 September 30, 2022  March 31, 2022 
Assets:      
Climate Solutions $
295.0  $
291.7 
Performance Technologies  339.2   357.0 
Other (a)
  758.0   778.3 
Total assets $1,392.2  $1,427.0 
 (a)
At December 31, 2021Represents cash and March 31, 2021,cash equivalents, other current assets, property plant and equipment, intangible assets, goodwill, deferred income taxes, and other noncurrent assets for the Climate Solutions and Performance Technologies segments and Corporate assets totaled $21.4 million and $17.5 million, respectively and were more than offset by eliminations for intercompany balances, including accounts receivable.

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MODINE MANUFACTURING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts)
(unaudited)
Note 21: Subsequent Event

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

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Item 2.Management'sManagement’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 December 31, 2021September 30, 2022 was the thirdsecond quarter of fiscal 2022.2023.

COVID-19 Pandemic and Supply Chain Disruptions and Inflationary Market Conditions
During fiscal 2022,Market and economic dynamics, including the effects on our company fromimpacts of the COVID-19 pandemic, have lessened, particularly compared with the heavily-impacted first half of fiscal 2021.  Although our manufacturing locations are open and operating, production has been negatively affected at times by employee absences due to COVID-19.

The COVID-19 pandemic and other market and economic dynamics have contributed to global supply chain challenges and inflationary market conditions.  Since the fourth quarter of fiscal 2022, the military conflict between Russia and Ukraine and the related sanctions imposed by governments in the U.S. and abroad have also impacted these market conditions, particularly driving higher oil and gas prices.  We, like many companies, have experienced labor shortages and negative impacts from supply chain challenges, including rising pricescosts for raw materials and logistics, as well as delays and shortages in certain commodities and components we purchase from suppliers.  In addition, our Automotive segment has been impacted by lower order volume associated with semiconductor shortages, which have caused lower global automotive production.  We are focused on mitigating the negative impacts of these supply chain challenges.challenges and inflationary market conditions.  We have implemented selling price increases for many of our products in response to raw material and other price increases and are engaged with suppliers to ensure availability of key raw materials.

We expect temporary disruptions due to illness-related employee absences and the pressures associated with supply chain challenges will continue, at least in the near term.  We cannot reasonably estimate the full impact that the COVID-19 pandemic or the ongoing supply chain challenges couldand other related economic and market dynamics will have on our business, results of operations, or cash flows in the future.

Liquid-cooled Automotive Business
On October 25, 2021, we announced that we agreed with Dana Incorporated (“Dana”) to terminate an agreement for the sale of the liquid-cooled automotive business.  We agreed that it was no longer in the best interest of either party to pursue the sale transaction further after being actively engaged in the regulatory review process in Germany for many months.

In connection with the termination of the sale agreement, we determined that the liquid-cooled automotive business no longer met the requirements to be classified as held for sale during the third quarter of fiscal 2022.  While held for sale, we had fully impaired the liquid-cooled automotive business’s  long-lived assets, which primarily consisted of property, plant and equipment assets.  Upon reverting back to held and used classification, we adjusted the long-lived assets to the lower of their (i) carrying value, as if held for sale classification had not been met; or (ii) fair value.  As a result, we reversed $57.2 million of previous impairment charges during the third quarter of fiscal 2022 within the Automotive segment.  In addition, we resumed depreciating the property, plant and equipment assets based upon the remeasured asset values during the third quarter of fiscal 2022.

Air-cooled Automotive Business
On April 30, 2021, we sold our air-cooled automotive business to Schmid Metall GmbH.  As a result of this transaction, we recorded a loss of $6.6 million during the first quarter of fiscal 2022.

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ThirdSecond Quarter Highlights
Net sales in the thirdsecond quarter of fiscal 20222023 increased $17.9$99.9 million, or 421 percent, from the thirdsecond quarter of fiscal 2021,2022, primarily due to higher sales in our Commercial IndustrialPerformance Technologies and Climate Solutions (“CIS”), Building HVAC Systems (“BHVAC”), and Heavy Duty Equipment (“HDE”) segments, partially offset by lower sales in our Automotive segment.segments.  Cost of sales increased $26.0$70.0 million, or 617 percent, compared with the third quarter of fiscal 2021, primarily due to higher sales volume and higher raw material prices,costs.  Gross profit increased $29.9 million and gross margin improved 280 basis points to 16.6 percent.  Selling, general and administrative (“SG&A”) expenses increased $6.9 million, primarily due to higher compensation-related expenses.  Operating income of $36.8 million during the second quarter of fiscal 2023 increased $26.3 million from the prior year, primarily due to higher earnings in our Climate Solutions and Performance Technologies segments.

Year-to-date Highlights
Net sales in the first six months of fiscal 2023 increased $146.3 million, or 15 percent, from the same period last year, primarily due to higher sales in our Climate Solutions and Performance Technologies segments.  Cost of sales increased $106.2 million, or 13 percent, from the same period last year, primarily due to higher sales volume and higher raw material costs, including underlying metal prices and related premiums, fabrication, freight, and packaging costs.  Gross profit decreased $8.1increased $40.1 million and gross margin declined 220 basis points to 14.9 percent.  Selling, general and administrative (“SG&A”) expenses decreased $5.8 million, primarily due to lower expenses for our review of strategic alternatives for the Automotive segment and lower compensation-related expenses.  Operating income of $79.4 million during the third quarter of fiscal 2022 represents an improvement of $188.1 million from the prior-year operating loss of $108.7 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 include $57.2 million of impairment reversals and $134.4 million of impairment charges, respectively, related to the liquid-cooled automotive business.

Year-to-date Highlights
Net sales in the first nine months of fiscal 2022 increased $182.2 million, or 14 percent, from the same period last year, primarily due to higher sales in our HDE, CIS and BHVAC segments, partially offset by lower sales in our Automotive segment.  Cost of sales increased $177.7 million, or 16 percent, from the same period last year, primarily due to higher raw material prices and higher sales volume.  Gross profit increased $4.5 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.  SG&A expenses increased $10.0$3.8 million, primarily due to higher compensation-related expenses as the prior-year benefitted from cost-saving actions implemented in response to COVID-19.  We withdrew most of these cost-saving actions in the third quarter of fiscal 2021 as production returned to more normal levels.expenses.  Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.02023 increased $43.2 million from the prior-year operating loss of $83.4 million.  The operating incomeprior year, primarily due to higher earnings in our Climate Solutions and operating loss during the year-to-date fiscal 2022 and 2021 periods include $55.7 million of impairment reversals and $134.4 million of impairment charges, respectively, primarily related to the liquid-cooled automotive business.

Restructuring
We have committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment.  Under this restructuring program, we are targeting approximately $20.0 million of annual cost savings on a consolidated basis.  We are currently determining the specific actions necessary to achieve our objectives.  At this time, we are unable to precisely estimate the timing and amount of the associated costs, but currently expect to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023.  We expect most of the restructuring expenses will be related to severance for headcount reductions.
Performance Technologies segments.

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CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

 Three months ended December 31, Nine months ended December 31,  Three months ended September 30, Six months ended September 30, 
 2021 2020 2021 2020  2022 2021 2022 2021 
(in millions) 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

 Three months ended December 31, Nine months ended December 31,  Three months ended September 30, Six months ended September 30, 
 2021 2020 2021 2020  2022 2021 2022 2021 
(in millions) 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 
Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%
Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%
Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%
Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%
Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

3127
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
30
HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

36
During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s		 % of sales 
Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%
Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%
Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%
Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%
Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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Table of Contents
DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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Table of Contents
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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Table of Contents
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
37
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
Table of Contents
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

30
Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

26
Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

32
Table of Contents
As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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Table of Contents
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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Table of Contents
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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.
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10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
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10.1.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
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104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
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43
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

33
28
Table of Contents
Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

29
Table of Contents
Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

35
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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
37
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

31
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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

32
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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
Table of Contents
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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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.

33
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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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

Table of Contents
Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
34
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
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PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

40
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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s  % of sales Net sales $90.6 100.0% $73.7 100.0% $234.7 100.0% $196.3 100.0% 
$
255.9
 
100.0
%
 
$
217.2
 
100.0
%
 
$
500.3
 
100.0
%
 
$
423.7
 
100.0
%
Cost of sales  63.2 69.7%  48.3 65.5%  169.5 72.2%  131.8 67.1%  
198.6
  
77.6
%
  
181.3
  
83.5
%
  
392.6
  
78.5
%
  
355.2
  
83.8
%
Gross profit 27.4 30.3% 25.4 34.5% 65.2 27.8% 64.5 32.9% 
57.3
 
22.4
%
 
35.9
 
16.5
%
 
107.7
 
21.5
%
 
68.5
 
16.2
%
Selling, general and administrative expenses  13.0 14.4%  10.5 14.3%  35.1 15.0%  28.9 14.8% 
24.3
 
9.5
%
 
21.8
 
10.0
%
 
47.7
 
9.5
%
 
43.4
 
10.3
%
Restructuring expenses 
0.3
 
0.1
%
 
0.2
 
0.1
%
 
0.3
 
0.1
%
 
0.2
 
-
 Impairment charge  
-
  
-
  
-
  
-
  
-
  
-
  
0.3
  
0.1
%
Operating income $14.4  15.9% $14.9  20.1% $30.1  12.8% $35.6  18.1% 
$
32.7
  
12.8
%
 
$
13.9
  
6.4
%
 
$
59.7
  
11.9
%
 
$
24.6
  
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales  

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales 

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

39
The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

41
Table of Contents
Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35
Table of Contents
PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

42
36
Table of Contents
Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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
 
43
37
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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


4438
s % of sales Net sales $502.2 100.0% $484.3 100.0% $1,475.7 100.0% $1,293.5 100.0% 
$
578.8
 
100.0
%
 
$
478.9
 
100.0
%
 
$
1,119.8
 
100.0
%
 
$
973.5
 
100.0
%
Cost of sales  427.6 85.1%  401.6 82.9%  1,261.6 85.5%  1,083.9 83.8%  
482.6
  
83.4
%
  
412.6
  
86.2
%
  
940.2
  
84.0
%
  
834.0
  
85.7
%
Gross profit 74.6 14.9% 82.7 17.1% 214.1 14.5% 209.6 16.2% 
96.2
 
16.6
%
 
66.3
 
13.8
%
 
179.6
 
16.0
%
 
139.5
 
14.3
%
Selling, general and administrative expenses 50.3 10.0% 56.1 11.6% 161.6 11.0% 151.6 11.7% 
58.8
 
10.1
%
 
51.9
 
10.8
%
 
115.1
 
10.3
%
 
111.3
 
11.4
%
Restructuring expenses 2.1 0.4% 0.9 0.2% 3.0 0.2% 7.0 0.5% 
0.6
 
0.1
%
 
0.6
 
0.1
%
 
2.1
 
0.2
%
 
0.9
 
0.1
%
Impairment charges (reversals) – net (57.2) -11.4% 134.4 27.8% (55.7) -3.8% 134.4 10.4%Impairment charges – net 
-
 
-
 
3.3
 
0.7
%
 
-
 
-
 
1.5
 
0.1
%
Loss on sale of assets  - -  - -  6.6 0.4%  - -   
-
  
-
  
-
  
-
  
-
  
-
  
6.6
  
0.7
%
Operating income (loss) 79.4 15.8% (108.7) -22.5% 98.6 6.7% (83.4) -6.5%Operating income 
36.8
 
6.4
%
 
10.5
 
2.2
%
 
62.4
 
5.6
%
 
19.2
 
2.0
%
Interest expense (3.8) -0.8% (4.6) -0.9% (11.8) -0.8% (15.2) -1.2% 
(4.7
)
 
-0.8
%
 
(3.8
)
 
-0.8
%
 
(8.8
)
 
-0.8
%
 
(8.0
)
 
-0.8
%
Other expense – net  (1.1) -0.2%  (0.5) -0.1%  (1.6) -0.1%  (1.0) -0.1%  
(1.4
)
  
-0.3
%
  
(0.7
)
  
-0.1
%
  
(3.7
)
  
-0.3
%
  
(0.5
)
  
-0.1
%
Earnings (loss) before income taxes 74.5 14.8% (113.8) -23.5% 85.2 5.8% (99.6) -7.7%Earnings before income taxes 
30.7
 
5.3
%
 
6.0
 
1.3
%
 
49.9
 
4.5
%
 
10.7
 
1.1
%
Provision for income taxes  (0.1) -  (81.6) -16.8%  (7.4) -0.5%  (95.3) -7.4%  
(6.4
)
  
-1.1
%
  
(5.4
)
  
-1.1
%
  
(11.3
)
  
-1.0
%
  
(7.3
)
  
-0.8
%
Net earnings (loss) $74.4  14.8% $(195.4)  -40.3% $77.8  5.3% $(194.9)  -15.1%Net earnings 
$
24.3
  
4.2
%
 
$
0.6
  
0.1
%
 
$
38.6
  
3.4
%
 
$
3.4
  
0.3
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

ThirdSecond quarter net sales of $502.2$578.8 million were $17.9$99.9 million, or 421 percent, higher than the thirdsecond quarter of the prior year, primarily due to higher sales volume in our each of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our CIS, BHVAC, and HDE segments,were partially offset by lower sales volume in our Automotive segment.a $36.3 million unfavorable impact of foreign currency exchange rates.  Sales in the CIS, BHVAC,Performance Technologies and HDEClimate Solutions segments increased $23.7 million, $16.9$59.2 million and $15.2$38.7 million, respectively.  Sales in the Automotive segment decreased $41.5 million, primarily due to the disposition of the air-cooled automotive business in the first quarter of fiscal 2022 and the negative impacts of the semiconductor shortages on the global automotive market.

ThirdSecond quarter cost of sales increased $26.0$70.0 million, or 617 percent, primarily due to higher sales volume and higher raw material prices,costs, which increased approximately $39.0 million, and higher sales volume in our CIS, BHVAC, and HDE segments.$15.0 million.  These drivers, which increased cost of sales,increases were partially offset by lower sales volume in the Automotive segment and improved operating efficiencies.a $31.6 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 220decreased 280 basis points to 85.1 percent.83.4 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, thirdsecond quarter gross profit decreased $8.1increased $29.9 million and gross margin declined 220improved 280 basis points to 14.916.6 percent.

ThirdSecond quarter SG&A expenses decreased $5.8increased $6.9 million, primaryprimarily driven by $2.6 million of lower costs at Corporate related to our review of strategic alternatives for the Automotive segment businesses and lowerhigher compensation-related expenses, which decreasedincreased approximately $2.0 million.$8.0 million, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by inflationary market conditions.  The lower compensation-related expenses were primarily due to lowerincluded higher incentive compensation and commission expenses, driven by improved financial results and higher sales, respectively, as compared with the prior year.  These increases were partially offset by a $2.6 million favorable impact of foreign currency exchange rates and lower strategic reorganization costs recorded at Corporate, in the current year.which decreased $1.6 million.

Restructuring expenses of $2.1$0.6 million in the thirdsecond quarter of fiscal 2022 increased $1.2 million compared with the third quarter of fiscal 2021,2023 primarily duerelated to higher severance expensesequipment transfer and facility closure costs in the CIS segment.Performance Technologies and Climate Solutions segments, respectively.

29
25
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DuringThe impairment charges of $3.3 million in the thirdsecond quarter of fiscal 2022 and in connection with the termination of the agreementrelated to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the business’s long-lived assets to the lower of their carrying or fair value.  During the third quarter of fiscal 2021, when the liquid-cooled automotive business was first classified as held for sale we recorded $134.4 million of impairment charges and reducedwithin the carrying value of the disposal group’s long-lived assets to zero.Performance Technologies segment.

Operating income of $79.4$36.8 million in the thirdsecond quarter of fiscal 2023 increased $26.3 million compared with the second quarter of fiscal 2022, represents a $188.1 million improvement from the prior-year operating loss of $108.7 million.  The operating incomeprimarily due to higher earnings in our Climate Solutions and operating loss during the third quarters of fiscal 2022 and 2021 included the significant impairment reversal and impairment charges, respectively, recorded within the Automotive segment.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and favorably impacted by lower SG&A expenses.Performance Technologies segments.

Interest expense induring the thirdsecond quarter of fiscal 2023 increased $0.9 million compared with the second quarter of fiscal 2022, decreased $0.8 million compared with the third quarter of fiscal 2021, primarily due to favorableunfavorable changes in interest rates.

The provision for income taxes was $0.1$6.4 million and $81.6$5.4 million in the thirdsecond quarter of fiscal 20222023 and 2021,2022, respectively.  The $81.5$1.0 million decreaseincrease was primarily due to the absence of $109.9 million of income tax charges recordedchanges in the prior year to increase the valuation allowances on deferred tax assets in themix and amount of foreign and U.S. and in certain foreign jurisdictions and an $8.2 million income tax benefit recorded in the current year resulting from the reversal of tax valuation allowances in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, wereearnings, partially offset by the absence of $37.7a $1.6 million of income tax benefitscharge recorded during the second quarter of the prior year related to the Automotive segment impairment charges.for a valuation allowance in a foreign jurisdiction.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

Fiscal 20222023 year-to-date net sales of $1,475.7$1,119.8 million were $182.2$146.3 million, or 1415 percent, higher than the same period last year, primarily due to higher sales volumesvolume in both of our segments and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases in our HDE, CIS, and BHVAC segments.were partially offset by a $62.9 million unfavorable impact of foreign currency exchange rates.  Sales in thesethe Climate Solutions and Performance Technologies segments increased $123.7 million, $86.6$76.6 million and $38.4$66.4 million, respectively.  Automotive segment sales decreased $61.9 million.

Fiscal 20222023 year-to-date cost of sales of $1,261.6$940.2 million increased $177.7$106.2 million, or 1613 percent, primarily due to higher sales volume and higher raw material prices, which increased approximately $117.0 million, and higher sales volume.  In addition, cost of sales in the first nine months of fiscal 2021 was favorably impacted by cost-saving actions taken in response to the COVID-19 pandemic.$49.0 million.  These factors, which caused an increase in cost of sales compared with the same period in the prior year,increases were partially offset by lower depreciation expense in the Automotive segment and improved operating efficiencies.a $54.7 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increaseddecreased 170 basis points to 85.5 percent.84.0 percent, primarily due to the favorable impact of higher sales volume and favorable commercial pricing, partially offset by higher material, labor and other inflationary costs.

As a result of higher sales and higherlower cost of sales as a percentage of sales, gross profit increased $4.5$40.1 million and gross margin declinedimproved 170 basis points to 14.516.0 percent.

Fiscal 20222023 year-to-date SG&A expenses increased $10.0 million.  The increase in SG&A expenses was$3.8 million, primarily due todriven by higher compensation-related expenses, as the prior year was favorablywhich increased approximately $10.0 million and included higher incentive compensation and commission-related expenses, and, to a lesser extent, increases in other general and administrative expenses that have been impacted by cost-saving actions implemented to mitigate the negative impacts of COVID-19.  In addition, environmental charges related to a previously-owned manufacturing facility in the U.S. increased $3.2 million.inflationary market conditions.  These increases were partially offset by lower costs and charges at Corporate and a $4.8 million favorable impact of foreign currency exchange rates.  Compared with the prior year, environmental charges related to a previously-closed manufacturing facility in the U.S., strategic reorganization costs, and lower costs related toassociated with our review of strategic alternatives for the Automotive segmentour automotive businesses whichrecorded at Corporate decreased $2.8$2.2 million, $2.2 million, and $1.3$2.0 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive management positions.

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Table of Contents
Restructuring expenses of $3.0$2.1 million in the first ninesix months of fiscal 2022 decreased $4.02023 increased $1.2 million compared with the same period last year, primarily due to lowerhigher severance expenses in the CIS and HDE segments.Performance Technologies segment.

The net impairment reversalscharges of $55.7$1.5 million during the first ninesix months of fiscal 2022 primarily related to the liquid-cooled automotive business within the Automotive segment.  In the prior year, we recorded $134.4 million of impairment charges to write down the long-lived assets in the liquid-cooled automotive business upon classification as held for sale.  In the current year, we adjusted the assets to the lower of carrying or fair value once they no longer met the held for sale classification criteria.in the Performance Technologies segment.

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Table of Contents
We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $6.6 million loss on sale at Corporate during the first quarter of fiscal 2022.

Operating income of $98.6$62.4 million during the first ninesix months of fiscal 2022 represents an improvement of $182.0 million from the prior-year operating loss of $83.4 million.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods included the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, the year-to-date fiscal 2022 operating income was favorably impacted by higher gross profit and lower restructuring expenses.  Operating income was negatively impacted by higher SG&A expenses and the loss on sale of the air-cooled automotive business.

Interest expense during the first nine months of fiscal 2022 decreased $3.42023 increased $43.2 million compared with the same period last year and was primarily due to favorablehigher earnings in our Climate Solutions and Performance Technologies segments, and the absence of the loss on the sale of the Austrian air-cooled automotive business in the prior year.

Interest expense during the first six months of fiscal 2023 increased $0.8 million compared with the same period in the prior year, primarily due to unfavorable changes in interest rates and lower debt outstanding during the current-year.rates.

The provision for income taxes was $7.4$11.3 million and $95.3$7.3 million during the first ninesix months of fiscal 20222023 and 2021,2022, respectively.  The $87.9$4.0 million decreaseincrease was primarily due to the absence of $116.5 million of income tax charges recorded in the prior year to increase the valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11.4$3.2 million income tax benefit recorded in the current year related to valuation allowances on deferred tax assets in foreign jurisdictions.  These drivers, which decreased the provision for income taxes, were partially offset by the absence of  $37.7 million of income tax benefitsjurisdictions recorded duringin the prior year related toand changes in the Automotive segment impairment charges.mix and amount of foreign and U.S. earnings.

SEGMENT RESULTS OF OPERATIONS

Effective JulyApril 1, 2021,2022, we alignedbegan managing the company under two operating segments, Climate Solutions and Performance Technologies.  Our new segment structure aligns businesses serving similar or complimentary end markets, products and technologies under common segment management.  We expect this simplified segment structure will allow us to better focus resources on targeted growth opportunities and allow for an efficient application of 80/20 principles across all product lines to optimize profit margins and cash flow.

The Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer products, heating, ventilating, air conditioning and refrigeration (“HVAC and refrigeration”) products, and data center businesses previously managed bycooling solutions.  The Performance Technologies segment provides products and reported withinsolutions that enhance the performance of customer applications and develops solutions that increase fuel economy and lower emissions in light of increasingly stringent government regulations.  The Performance Technologies segment designs and manufactures air- and liquid-cooled technology for vehicular, stationary power, and industrial applications.  In addition, the Performance Technologies segment provides advanced thermal solutions to zero-emission and hybrid commercial vehicle and automotive customers and coating products and application services.

The Climate Solutions segment includes the previously-reported Building HVAC Systems and Commercial and Industrial Solutions (“CIS”) segments, with the exception of CIS Coatings.  The Performance Technologies segment includes the previously-reported Heavy Duty Equipment and Automotive segments and the CIS segment under the BHVAC segment.  The BHVAC segment assumed management of our business in Guadalajara, Spain and a portion of our business in Grenada, Mississippi.  Through this segment change, we have aligned our data center businesses under the BHVAC leadership team in order to accelerate commercial excellence, operational improvements, and organizational efficiencies.  As a result, we revised our reporting segments and are reporting the financial results of the transferred businesses within the BHVAC segment.Coatings business.  The segment realignment had no impact on the HDE and Automotive segments or on our consolidated financial position, results of operations, and cash flows.  Segment financial information for the prior periodsfiscal 2022 has been recast to conform to the current presentation.

As part of the July 1, 2021 segment realignment, we reassigned a portion of goodwill from the CIS segment to the BHVAC segment and tested our reporting units for potential impairment.  While we concluded that goodwill was not impaired, we identified that the Coils and Coolers reporting unit has a heightened risk of impairment.  See Note 14 of the Notes to Condensed Consolidated Financial Statements for further information.

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Table of Contents
The following is a discussion of our segment results of operations for the three months and ninesix months ended December 31, 2021September 30, 2022 and 2020:2021:

Building HVAC SystemsClimate Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $90.6   100.0% $73.7   100.0% $234.7   100.0% $196.3   100.0%
Cost of sales  63.2   69.7%  48.3   65.5%  169.5   72.2%  131.8   67.1%
Gross profit  27.4   30.3%  25.4   34.5%  65.2   27.8%  64.5   32.9%
Selling, general and administrative expenses  13.0   14.4%  10.5   14.3%  35.1   15.0%  28.9   14.8%
Operating income $14.4   15.9% $14.9   20.1% $30.1   12.8% $35.6   18.1%
  Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
255.9
   
100.0
%
 
$
217.2
   
100.0
%
 
$
500.3
   
100.0
%
 
$
423.7
   
100.0
%
Cost of sales  
198.6
   
77.6
%
  
181.3
   
83.5
%
  
392.6
   
78.5
%
  
355.2
   
83.8
%
Gross profit  
57.3
   
22.4
%
  
35.9
   
16.5
%
  
107.7
   
21.5
%
  
68.5
   
16.2
%
Selling, general and administrative expenses  
24.3
   
9.5
%
  
21.8
   
10.0
%
  
47.7
   
9.5
%
  
43.4
   
10.3
%
Restructuring expenses  
0.3
   
0.1
%
  
0.2
   
0.1
%
  
0.3
   
0.1
%
  
0.2
   
-
 
Impairment charge  
-
   
-
   
-
   
-
   
-
   
-
   
0.3
   
0.1
%
Operating income 
$
32.7
   
12.8
%
 
$
13.9
   
6.4
%
 
$
59.7
   
11.9
%
 
$
24.6
   
5.8
%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

BHVACClimate Solutions net sales increased $16.9$38.7 million, or 2318 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume and tofavorable commercial pricing.  These increases were partially offset by a lesser extent, favorable pricing adjustments in response to raw material price increases.$16.5 million unfavorable impact of foreign currency exchange rates.  Compared with the thirdsecond quarter of the prior year, BHVAC sales toof heat transfer, data center customerscooling, and HVAC & refrigeration products increased $11.6 million.  In addition, sales to commercial HVAC customers increased $5.2$15.7 million, primarily due to higher sales of ventilation$14.0 million, and heating products in North America.$9.1 million, respectively.

BHVACClimate Solutions cost of sales increased $14.9$17.3 million, or 3110 percent, from the thirdsecond quarter of fiscal 20212022 to the thirdsecond quarter of fiscal 2022,2023, primarily due to higher sales volume, higher raw material prices, which increased by approximately $4.0 million, and, to a lesser extent, higher labor costs.  As a percentage of sales, cost of sales increased 420 basis points to 69.7 percent, primarily due to the higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.0 million and gross margin declined 420 basis points to 30.3 percent.  While we have been focused on adjusting selling prices in response to higher material costs, gross margin was unfavorably impacted due to the timing lag of such price adjustments as compared with material prices at the purchase date.

SG&A expenses increased $2.5 million, or 10 basis points as a percentage of sales, from the prior year. The increase in SG&A expenses was primarily due to higher compensation-related expenses.

Operating income of $14.4 million decreased $0.5 million from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of Nine Months ended December 31, 2021 and 2020

BHVAC year-to-date sales increased $38.4 million, or 20 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, favorable pricing adjustments in response to raw material price increases and a $5.7$14.3 million favorable impact of foreign currency exchange rates.  Sales to commercial HVAC customers increased $24.5 million, primarily due to higher sales of heating and air conditioning products.  In addition, sales to data center customers increased $13.0 million.

BHVAC year-to-date cost of sales increased $37.7 million, or 29 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  In addition, cost of sales was unfavorably impacted by $4.8 million from foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 510 basis points to 72.2 percent, primarily due to the higher material costs.

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As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $0.7 million and gross margin declined 510 basis points to 27.8 percent.

BHVAC year-to-date SG&A expenses increased $6.2 million, or 20 basis points as a percentage of sales, compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

Operating income of $30.1 million decreased $5.5 million from the same period last year, primarily due to higher SG&A expenses.

Commercial and Industrial Solutions

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $148.6   100.0% $124.9   100.0% $456.2   100.0% $369.6   100.0%
Cost of sales  130.9   88.1%  112.0   89.7%  399.4   87.5%  324.8   87.9%
Gross profit  17.7   11.9%  12.9   10.3%  56.8   12.5%  44.8   12.1%
Selling, general and administrative expenses  12.4   8.4%  13.1   10.4%  37.7   8.3%  36.0   9.7%
Restructuring expenses  1.9   1.3%  0.5   0.4%  2.1   0.5%  4.4   1.2%
Impairment charge  -   -   -   -   0.3   0.1%  -   - 
Operating income (loss) $3.4   2.2% $(0.7)  -0.5% $16.7   3.6% $4.4   1.2%

Comparison of Three Months ended December 31, 2021 and 2020

CIS net sales increased $23.7 million, or 19 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and favorable product pricing adjustments in response to raw material price increases.  Compared with the third quarter of the prior year, sales to commercial HVAC&R customers increased $24.5 million.

CIS cost of sales increased $18.9 million, or 17 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased by approximately $12.0 million.  As a percentage of sales, cost of sales decreased 160590 basis points to 88.177.6 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $4.8$21.4 million and gross margin improved 160590 basis points to 11.922.4 percent.

SG&A expenses increased $2.5 million, yet decreased $0.750 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $3.0 million and included higher commission expenses.  This increase was partially offset by a $1.3 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses of $0.3 million increased $0.1 million compared with the third quarter of the prior year. As a percentage of sales, SG&A expenses decreased by 200 basis points.

Restructuring expenses increased $1.4 million compared with the third quarter of fiscal 2021, primarily due to higher severance expenses.  The severance expenses in the thirdsecond quarter of fiscal 2022, primarily due to closure costs related to targeted headcount reductions in Europe and China.a previously-leased facility.

Operating income of $3.4$32.7 million represents a $4.1increased $18.8 million improvement from the prior-year operating losssecond quarter of $0.7 million and wasfiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit.profit, partially offset by higher SG&A expenses.

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Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

CISClimate Solutions year-to-date net sales increased $86.6$76.6 million, or 2318 percent, from the same period last year, primarily due to higher sales volume and favorable productcommercial pricing, including adjustments in response to raw material price increases.  In addition, salesThese increases were favorably impactedpartially offset by $5.7a $29.9 million fromunfavorable impact of foreign currency exchange rates.  The fiscal 2021 CIS sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Sales to commercial HVAC&R customers increased $87.5 million during the first nine months of fiscal 2022, comparedCompared with the same period in the prior year.year, sales of heat transfer, data center cooling, and HVAC & refrigeration products increased $38.5 million, $21.3 million, and $16.7 million, respectively.

CISClimate Solutions year-to-date cost of sales increased $74.6$37.4 million, or 2311 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $43.0$17.0 million.  In addition, costThese increases were partially offset by a $25.4 million favorable impact of sales was unfavorably impacted by $5.1 million from foreign currency exchange rate changes.rates.  As a percentage of sales, cost of sales decreased 40530 basis points to 87.578.5 percent, primarily due to the favorable impactsimpact of the higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher materiallabor and inflationary costs.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.0$39.2 million and gross margin improved 40530 basis points to 12.521.5 percent.

CISClimate Solutions year-to-date SG&A expenses increased $1.7$4.3 million, yet decreased 14080 basis points as a percentage of sales, from the same period last year.sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.expenses, including higher commission expenses, andincreases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $2.4 million favorable impact of foreign currency exchange rate changes.

Restructuring expenses during the first nine months of fiscal 2022 decreased $2.3$0.3 million fromincreased $0.1 million compared with the same period last year, primarily due to lower severance expenses.  The severance expenses during the first nine months of fiscal 2022 primarilyclosure costs related to targeted headcount reductions in Europe and China.  The severance-related expenses during the first nine months of fiscal 2021 primarily related to plant consolidation activities in China and targeted headcount reductions in North America.a previously-leased facility.

During the first quarter of fiscal 2022, we recorded an impairment charge of $0.3 million to write downwrite-down a previously-closed manufacturing facility in the U.SU.S. to fair value less costs to sell.  We sold the facility and received net cash proceeds of $0.7 million during July 2021.

Operating income during the first nine months of fiscal 2022$59.7 million increased $12.3$35.1 million from the same period last year, primarily due to higher gross profit, and lower restructuring expenses, partially offset by higher SG&A expenses.

Performance Technologies
34


Three months ended September 30,  Six months ended September 30, 
  2022  2021  2022  2021 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales 
$
330.0
   
100.0
%
 
$
270.8
   
100.0
%
 
$
634.3
   
100.0
%
 
$
567.9
   
100.0
%
Cost of sales  
290.8
   
88.1
%
  
241.3
   
89.1
%
  
562.1
   
88.6
%
  
498.2
   
87.7
%
Gross profit  
39.2
   
11.9
%
  
29.5
   
10.9
%
  
72.2
   
11.4
%
  
69.7
   
12.3
%
Selling, general and administrative expenses  
22.6
   
6.9
%
  
23.7
   
8.7
%
  
46.7
   
7.4
%
  
50.0
   
8.8
%
Restructuring expenses  
0.3
   
0.1
%
  
0.4
   
0.2
%
  
1.8
   
0.3
%
  
0.7
   
0.1
%
Impairment charges - net  
-
   
-
   
3.3
   
1.2
%
  
-
   
-
   
1.2
   
0.2
%
Operating income 
$
16.3
   
4.9
%
 
$
2.1
   
0.8
%
 
$
23.7
   
3.7
%
 
$
17.8
   
3.1
%

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Heavy Duty Equipment

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $200.8   100.0% $185.6   100.0% $598.4   100.0% $474.7   100.0%
Cost of sales  178.6   88.9%  159.6   86.0%  535.3   89.5%  413.8   87.2%
Gross profit  22.2   11.1%  26.0   14.0%  63.1   10.5%  60.9   12.8%
Selling, general and administrative expenses  11.7   5.9%  13.2   7.1%  37.4   6.2%  35.4   7.4%
Restructuring expenses  0.2   0.1%  -   -   0.7   0.1%  1.9   0.4%
Operating income $10.3   5.1% $12.8   6.8% $25.0   4.2% $23.6   5.0%

Comparison of Three Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies net sales increased $15.2$59.2 million, or 822 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and favorable commercial pricing, including adjustments associated within response to raw material price increases.  These increases were partially offset by a $19.9 million unfavorable impact of foreign currency exchange rates.  Compared with the second quarter of the prior year, sales of air-cooled, liquid-cooled, and higher sales volume.  Sales to off-highway and commercial vehicle customersadvanced solutions products increased $12.3$33.1 million, $21.9 million, and $10.7$6.1 million respectively.  Sales to automotive and light vehicle customers decreased $7.7 million.

HDEPerformance Technologies cost of sales increased $19.0$49.5 million, or 1221 percent, from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher sales volume and higher raw material prices, which increased by approximately $19.0 million, and$13.0 million.  In addition, to a lesser extent, higher sales volume.  These drivers, which increasedlabor costs and higher depreciation expenses negatively impacted cost of sales in the second quarter of fiscal 2023.  During the second quarter of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by improved operating efficiencies.  While we have provisions within manya $17.4 million favorable impact of our long-term customer contracts that provide for prospective selling price adjustments based upon changes in raw material costs, there is often a three-month to one-year lag until the time the price adjustments take effect, and the contract provisions are typically limited to the underlying cost of the material and do not include related premiums or fabrication costs.foreign currency exchange rates.  As a percentage of sales, cost of sales increased 290decreased 100 basis points to 88.988.1 percent, primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher labor and inflationary costs and, to a lesser extent, higher material prices.costs.

As a result of the higher sales and higherlower cost of sales as a percentage of sales, gross profit decreased $3.8increased $9.7 million and gross margin declined 290improved 100 basis points to 11.111.9 percent.

SG&A expenses decreased $1.5$1.1 million or 120 basis points ascompared with the second quarter of the prior year.  As a percentage of sales, compared with the third quarter of the prior year.SG&A expenses decreased by 180 basis points.  The decrease in SG&A expenses was primarily due to a $1.5 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower development costs and environmental charges.compensation-related expenses.  These decreases were partially offset by higher compensation-relatedincreases in other general and administrative expenses which increased approximately $1.0 million.that have been impacted by inflationary market conditions.

Restructuring expenses duringof $0.3 million decreased $0.1 million compared with the third quarter of fiscal 2022 were $0.2 million and primarily consisted of equipment transfer costs in North America.

Operating income decreased $2.5 million from the third quarter of fiscal 2021 to the thirdsecond quarter of fiscal 2022, primarily due to lower equipment transfer costs.

The impairment charges of $3.3 million in the second quarter of fiscal 2022 related to assets in our liquid-cooled automotive business, which were held for sale during the quarter.

Operating income of $16.3 million increased $14.2 million from the second quarter of fiscal 2022 to the second quarter of fiscal 2023, primarily due to higher gross profit partially offset by lower SG&A expenses.and the absence of impairment charges.

Comparison of NineSix Months ended December 31,September 30, 2022 and 2021 and 2020

HDEPerformance Technologies year-to-date net sales increased $123.7$66.4 million, or 2612 percent, from the same period last year, primarily due to higher sales volume and favorable commercial pricing, including adjustments in response to raw material price increases.  These increases were partially offset by a $33.1 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, pricing adjustments associatedthe absence of sales from the Austrian air-cooled automotive business, which we sold on April 30, 2021.  Compared with raw material price increases.  HDE sales in fiscal 2021, primarilythe same period in the first quarter, were negatively impacted by the COVID-19 pandemic.  Sales to commercial vehicleprior year, sales of air-cooled, liquid-cooled, and off-highway customersadvanced solutions products increased $59.0$44.6 million, $14.1 million, and $57.7$11.1 million respectively.

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HDEPerformance Technologies year-to-date cost of sales increased $121.5$63.9 million, or 2913 percent, from the same period last year, primarily due to higher sales volume and higher raw material prices, which increased by approximately $53.0$32.0 million.  In addition, to a lesser extent, higher labor costs and higher depreciation expenses negatively impacted cost of sales.  During the first six months of fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business.  We resumed depreciating these assets when they reverted back to held and used classification during the third quarter of fiscal 2022.  These increases were partially offset by a $29.4 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales increased 23090 basis points to 89.588.6 percent, primarily due to the higher material, prices.labor and other inflationary costs, partially offset by the favorable impact of higher sales volume.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.2$2.5 million and gross margin declined 23090 basis points to 10.511.4 percent.

HDEPerformance Technologies year-to-date SG&A expenses increased $2.0decreased $3.3 million but decreased 120 basis points as a percentage of sales, compared with the same period in the priorlast year.  As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.  The increasedecrease in SG&A expenses was primarily due to highera $2.6 million favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, which increased approximately $5.0 million, partially offset by lower development and other administrative costs.expenses.

Restructuring expenses decreased $1.2 million from the same period last year, primarily due to lower severance expenses and equipment transfer costs.

Operating income during the first ninesix months of fiscal 20222023 increased $1.4$1.1 million fromcompared with the same period last year, primarily due to higher gross profit and lower restructuringseverance expenses.  The severance expenses partially offset by higher SG&A expenses.

Automotive

  Three months ended December 31,  Nine months ended December 31, 
  2021  2020  2021  2020 
(in millions) $'s  % of sales  $'s  % of sales  $'s  % of sales  $'s  % of sales 
Net sales $72.4   100.0% $113.9   100.0% $224.0   100.0% $285.9   100.0%
Cost of sales  64.9   89.6%  95.5   83.9%  196.1   87.6%  246.1   86.1%
Gross profit  7.5   10.4%  18.4   16.1%  27.9   12.4%  39.8   13.9%
Selling, general and administrative expenses  9.7   13.4%  8.5   7.4%  30.1   13.4%  25.5   8.9%
Restructuring expenses  -   -   0.4   0.4%  0.2   0.1%  0.6   0.2%
Impairment charges (reversals) – net  (57.2)  -79.0%  134.4   118.0%  (56.0)  -25.0%  134.4   47.0%
Operating income (loss) $55.0   76.0% $(124.9)  -109.7% $53.6   24.0% $(120.7)  -42.2%

Comparison of Three Months ended December 31, 2021 and 2020

Automotive net sales decreased $41.5 million, or 36 percent, fromduring the third quarterfirst six months of fiscal 20212023 primarily related to targeted headcount reductions in Europe.  Restructuring expenses during the third quarterfirst six months of fiscal 2022 primarily due to the dispositionconsisted of the air-cooled automotive business, which closed on April 30, 2021, and lower sales volume, largely associated with the negative impacts of the semiconductor shortages on the global automotive market.  The air-cooled automotive sales were $18.0 million during the third quarter of fiscal 2021.  Sales in Europe, North America, and Asia decreased $31.7 million, $6.8 million and $3.0 million, respectively.

Automotive cost of sales decreased $30.6 million, or 32 percent, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily due to lower sales volume.  This decrease was partially offset by higher raw material prices, which increased approximately $4.0 million.  As a percentage of sales, cost of sales increased 570 basis points to 89.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $10.9 million and gross margin declined 570 basis points to 10.4 percent.

SG&A expenses increased $1.2 million compared with the third quarter of the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses.

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During the third quarter of fiscal 2022 and in connection with the termination of the agreement to sell the liquid-cooled automotive business, we reversed $57.2 million of previously-recorded impairment charges to adjust the long-lived assets of the liquid-cooled automotive business to the lower of their carrying or fair value.  The $134.4 million of impairment charges in the same period last year also primarily related to the liquid-cooled automotive business, which was first classified as held for sale during the third quarter of fiscal 2021.

Operating income of $55.0 million during the third quarter of fiscal 2022 represents a $179.9 million improvement from the prior-year operating loss of $124.9 million.  The operating income and operating loss during the third quarters of fiscal 2022 and 2021 were driven by the significant impairment reversal and impairment charges, respectively, related to the liquid-cooled automotive business.  In addition, as compared with the third quarter of fiscal 2021, operating income was unfavorably impacted by lower gross profit and higher SG&A expenses.

Comparison of Nine Months ended December 31, 2021 and 2020

Automotive year-to-date net sales decreased $61.9 million, or 22 percent, from the same period last year, primarily due to $40.0 million of lower sales from the air-cooled automotive business that we sold earlier this fiscal year and lower sales volume, partially offset by a $6.4 million favorable impact of foreign currency exchange rate changes.  The fiscal 2021 year-to-date sales were negatively impacted by the COVID-19 pandemic, primarily in the first half of the fiscal year.  Fiscal 2022 year-to-date sales have been negatively impacted by the semiconductor shortages and its impact on the global automotive market.  Sales in Europe, North America, and Asia decreased $37.8 million, $14.2 million, and $9.9 million, respectively.

Automotive year-to-date cost of sales decreased $50.0 million, or 20 percent, from the same period last year, primarily due to lower sales volume and lower depreciation expenses, which decreased $9.9 million.  We ceased depreciating the property, plant and equipment assets within the liquid- and air-cooled automotive businesses when they were classified as held for sale during the second half of fiscal 2021.  Upon reverting back to held and used classification during the third quarter of fiscal 2022, we resumed depreciating the property, plant and equipment assets in the liquid-cooled automotive business.  These decreases were partially offset by higher raw material prices, which increased approximately $9.0 million, and a $5.3 million unfavorable impact of foreign currency exchange rate changes.  As a percentage of sales, cost of sales increased 150 basis points to 87.6 percent.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $11.9 million and gross margin declined 150 basis points to 12.4 percent.

Automotive year-to-date SG&A expenses increased $4.6 million compared with the same period last year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $2.0 million, and a $0.7 million unfavorable impact of foreign currency exchange rate changes.transfer costs.

The year-to-date net impairment reversalcharges of $56.0$1.2 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  The $57.2 million impairment reversal during the third quarter of fiscal 2022 was partially offset by $1.2 million of net impairment charges recorded duringDuring the first six months of fiscal 2022.  During the first two quarters of fiscal 2022, we recorded a total of $8.6 million of non-cash impairment charges related to the Automotive segment’sassets held for sale assets.sale.  These impairment charges were partially offset by a $7.4 million impairment reversal related to certain manufacturing operationsrecorded during the first quarter of fiscal 2022 in connection with a sale perimeter modification with the prospective buyer.  As a result of the modification, we adjusted the long-lived assets that no longer met the requirements to be classified as held for sale due to a modification in the sale perimeter during the first quarter of fiscal 2022.

their estimated fair value.
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Operating income of $53.6$23.7 million during the first nine months of fiscal 2022 represents a $174.3increased $5.9 million improvement from the operating loss of $120.7 million in the same period last year.  The operating income and operating loss during the year-to-date fiscal 2022 and 2021 periods were driven by the significant impairment reversal and impairment charges, respectively, relatedyear, primarily due to the liquid-cooled automotive business.  In addition, as compared with the first nine months of fiscal 2021, year-to-date fiscal 2022 operating income was unfavorably impacted by lower gross profitSG&A expenses and higher SG&A expenses.gross profit.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents of $61.1 million as of December 31, 2021September 30, 2022 of $70.1 million, and an available borrowing capacity of $163.1 million under our revolving credit facility.  Given our extensive international operations, approximately $59.0$66.0 million of our cash and cash equivalents is held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated.  We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.

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Net Cash Provided by Operating Activities
Net cash provided by operating activities for the ninesix months ended December 31, 2021September 30, 2022 was $7.4$56.1 million, which represents a $139.1$75.1 million decreaseincrease compared with the net cash used for operating activities in the same period in the prior year.  This decreaseincrease in operating cash flow was primarily due to unfavorablefavorable net changes in working capital includingand the favorable impact of higher inventory levels and higher payments for incentive compensation and employee benefitsearnings, as compared with the same period in the prior year.  Inventory, including amounts held for sale,While inventories have increased $57.8$12.5 million from March 31, 20212022 to December 31, 2021.  TheSeptember 30, 2022, the increase has been less significant than the increase during the same period last year.  In fiscal 2023, the Company has increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels in fiscal 2022 have largely resulted from both increased raw material prices and strategic safety stock builds in connection withimpacts from global supply chain constraints and challenges.challenges, which continue to impact our businesses in fiscal 2023.  In addition, the favorable changes in working capital include lower payments for incentive compensation and lower pension plan contributions in fiscal 2023, as compared with the same period in the prior year.

Capital Expenditures
Capital expenditures of $30.7$23.0 million during the first ninesix months of fiscal 20222023 increased $7.0$2.6 million compared with the same period in the prior year.  In fiscal 2021, we delayed certain projects and the purchase of certain program-related equipment and tooling to preserve our financial liquidity in response to the COVID-19 pandemic.

Debt
In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement modified our then existing $250.0 million revolver and term loan facilities, which would have matured in June 2024.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant discussed further below.  Also, as specified in the credit agreement, the term loans may require prepayments in the event of certain asset sales.  In addition, at the time of each incremental borrowing under the revolving credit facility, we must represent to the lenders that there has been no material adverse effect, as defined in the credit agreement, on our business, property, or results of operations.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).  We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.  As of December 31, 2021,September 30, 2022, our leverage ratio and interest coverage ratio were 2.51.7 and 10.0,12.7, respectively.  We expect to remain in compliance with our debt covenants during the remainder of fiscal 20222023 and beyond.

38Share Repurchase Program
During the first six months of fiscal 2023, we repurchased $2.6 million of our common stock.  As our current repurchase authorization expires in early November 2022, our Board of Directors has authorized additional share repurchases of up to $50.0 million.  This authorization expires on November 5, 2024.  Our decision whether and to what extent to repurchase additional shares will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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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, 2021.2022.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

The impact of potential adverse developments or disruptions in the COVID-19 pandemic on the national and global economy our business, suppliersand financial markets, including impacts related to inflation, including rising energy costs, along with supply chain challenges, tariffs, sanctions and other trade issues or cross-border trade restrictions (and any potential resulting trade war), and including impacts associated with the supply chain), customers,military conflict between Russia and employees;Ukraine;

Economic,
The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including in particular, foreign currency exchange rate fluctuations; supply chain disruptions; inflation; tariffs (and any potential trade war resulting from tariffs or retaliatory actions); changesincreases in interest rates; recession and recovery therefrom; restrictions and uncertainty associated with cross-border trade or public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic; and the general uncertainties about the impact of regulatory and/or policy changes, including those related to tax and trade the COVID-19 pandemic and other matters, that have been or may be implemented in the U.S. or abroad, as well as continuing uncertainty regarding the implications of “Brexit”;abroad;

The impact of potential further 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 fabrication, or freightfabrication costs.  These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand.  This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, whetherincluding 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

Our ability to mitigate increased labor costs and labor shortages;

The impact of the COVID-19 pandemic on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; 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;

The impact of any problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;

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The overall health of and price-reduction pressure from 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;

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Our ability to maintain current customer relationships and compete effectively for new business, including our ability to offsetachieve profit margins acceptable to us by offsetting or otherwise address increasing pricing pressures from competitorsaddressing any cost increases associated with supply chain challenges and price reduction and overall service pressures from customers, particularly in the face of macro-economic instability;inflationary market conditions;

The impact of product or manufacturing difficulties or operating inefficiencies, including any program launch and product transfer challenges and warranty claims andclaims;

The impact of delays or inefficiencies resulting from restrictions imposed in responsemodifications initiated by major customers with respect to the COVID-19 pandemic;program launches, product applications or requirements;


•The impact of any delays or modifications initiated by major customers with respect to the timing of projects, program launches, product applications or volume requirements, including order volume changes associated with supply chain challenges, such as semiconductor shortages;

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 modifymanage our cost structure in response to sales volume increases or decreases 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; particularlyincluding when related to the actions or inactions of others and/or facilities over which we have no control;

Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions, 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 anya 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 litigation, claims, or other obligations.

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Strategic Risks:


•Our ability to successfully realize anticipated benefits from strategic initiatives and the implementation of our 80/20 strategy, through which we are focused on growing businesses with strong market drivers;

Our ability to identifysuccessfully realize anticipated benefits from strategic initiatives and our continued application of 80/20 principles across our business, through which we are focused on reducing complexity and growing businesses with strong market drivers;

Our ability to successfully execute strategies in our automotive businesses to reduce costs and improve operating margins; and

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

The potential impacts from any 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’sour current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;

The impact of potential increases in interest rates particularly in LIBOR and the Euro Interbank Offered Rate (“EURIBOR”) in relation to our variable-rate debt obligations;

The impact of changes in federal, state or local tax regulationstaxes that could have the effect of increasing our income tax expense;

Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and

Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021.2022.  The Company’s market risks have not materially changed since the fiscal 20212022 Form 10-K was filed.

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Item 4.Controls and Procedures.

Evaluation Regarding Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, management of the Company, under the supervision, and with the participation, of the Company’s President and Chief Executive Officer and Executive Vice President, Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, at a reasonable assurance level, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, as of December 31, 2021.September 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the thirdsecond quarter of fiscal 20222023 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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following describes the Company’s purchases of common stock during the thirdsecond quarter of fiscal 2022:2023:

 
 
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
Be Purchased Under the
Plans or Programs (a)
October 1 – October 31, 202136,644 (b)
$11.94
_______

$50,000,000
     
November 1 – November 30, 2021
_______

_______

_______

50,000,000
     
December 1 – December 31, 20214,189 (b)
$10.20
_______

50,000,000
     
Total40,833 (b)
$11.76
_______

 
Period
Total Number of
Shares Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares
that May Yet Be Purchased
Under the Plans or Programs (a)
July 1 – July 31, 2022
56 (b)$10.55
_______

$48,894,053

    
August 1 – August 31, 2022
2,719 (b)$16.56
_______

$48,894,053

    
September 1 – September 30, 2022
100,000 (c)$15.35
100,000
$47,359,156

    
Total
102,775$15.38100,000 

(a)Effective
In fiscal 2021, the Company’s Board of Directors previously authorized officers to repurchase up to $50.0 million of Modine common stock at such times and prices they deemed appropriate.  As the current repurchase program expires in early November 5, 2020,2022, the Board of Directors approvedeffectively extended the program by approving a new two-year, $50.0 million share repurchase program which allows the Company to repurchase Modine common stock through solicited and unsolicited transactions in the open market or in privately-negotiated or other transactions, at such times and prices and upon such other terms as the authorized officers of the Company deem appropriate.that will become effective on November 5, 2022.

(b)Consists of
Includes shares delivered back to the Company by employees and/or directors to satisfy tax withholding obligations that arise upon the vesting of stock awards.  The Company, pursuant to its equity compensation plans, gives participants the opportunity to turn back to the Company the number of shares from the award sufficient to satisfy tax withholding obligations that arise upon the termination of restrictions.  These shares are held as treasury shares.

(c)
Includes shares acquired pursuant to the repurchase program described in (a) above.

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Item 5.Other Information.

The Company has committed to restructuring actions intended to reduce SG&A and operational expenses, particularly within the Automotive segment. Under this restructuring program, the Company is targeting approximately $20.0 million of annual cost savings on a consolidated basis. The Company is currently determining the specific actions necessary to achieve its objectives. At this time, the Company is unable to precisely estimate the timing and amount of the associated costs, but currently expects to record approximately $20.0 million to $25.0 million of restructuring expenses during either the fourth quarter of fiscal 2022 or early in fiscal 2023. The Company expects most of the restructuring expenses will be related to severance for headcount reductions.

Item 6.Exhibits.

(a)
Exhibits:

Exhibit No.
Description
Incorporated Herein By
Reference To
Filed
Herewith
2.14.1
Termination
Fifth Amended and Restated Credit Agreement by and between the Company and Dana Incorporated, dated as of October 25, 2021.12, 2022.
Exhibit 2.14.1 to Registrant’s Current Report on Form 8-K dated October 25, 202112, 2022
 
    
10.1
Separation Letter Agreement between the Company and Joel T. Casterton,
Form of Fiscal 2023 Modine Retention Restricted Stock Unit Award Agreement.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated as of October 25, 2021.
X
19, 2022 
10.2
Separation Letter Agreement between the Company and Matthew J. McBurney, dated as of October 30, 2021.X
    
31.1
Rule 13a-14(a)/15d-14(a) Certification of Neil D. Brinker, President and Chief Executive Officer.
 X


 
31.2

Rule 13a-14(a)/15d-14(a) Certification of Michael B. Lucareli, Executive Vice President, Chief Financial Officer. X
    
32.1
Section 1350 Certification of Neil D. Brinker,  President and Chief Executive Officer.
 X


 
32.2
Section 1350 Certification of Michael B. Lucareli, Executive Vice President, 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
    
10.1.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
 X
    
10.1.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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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, Executive Vice President, Chief Financial Officer*
Date: November 3, 2022

*
By: /s/ Michael B. Lucareli
Michael B. Lucareli, Executive Vice President, Chief Financial Officer*

Date: February 3, 2022

* Executing as both the principal financial officer and a duly authorized officer of the Company


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