MODINE MANUFACTURING CO

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

CONSOLIDATEDBALANCE SHEETS

December 31, 2023 and March 31, 2023

CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS

For the nine months ended December 31, 2023 and 2022

CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY

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 nine months of fiscal 2024 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, 2023.

New accounting guidance

Supplier finance programs

In September 2022, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosure of supplier finance programs including the key terms, outstanding obligations, and where such obligations are presented within the financial statements. In addition, beginning for fiscal 2025, a roll forward of obligations under such programs will be required annually. The new guidance does not impact the recognition, measurement or financial statement presentation of supplier finance program obligations. The Company adopted this guidance as of April 1, 2023.

The Company facilitates a voluntary supplier finance program through a financial institution that allows certain suppliers in the U.S. and Europe to request early payment for invoices, at a discount, from the financial institution. The Company or the financial institution may terminate the supplier finance program upon 90 days’ notice. The Company’s obligations to its suppliers, including amounts due and payment terms, are consistent, irrespective of whether a supplier participates in the program. The Company is not party to the arrangements between the participating suppliers and the financial institution. Under this program, the Company confirms the validity of supplier invoices to the financial institution and remits payments to it based on the original payment terms, which typically range from 60 to 120 days. The outstanding obligations under this program, included within accounts payable in the consolidated balance sheets, totaled $16.1 million and $21.2 million at December 31, 2023 and March 31, 2023, respectively.

Segment reporting disclosures

In November 2023, the FASB issued new disclosure guidance for reportable segments. The new guidance will require disclosure of significant segment expenses, which are expenses that are (i) significant to the segment, (ii) regularly provided to the chief operating decision maker (“CODM”) and (iii) included in the reported measure of segment profit or loss. In addition, the new guidance will require companies to disclose the title and position of their CODM and expand interim disclosures to include the majority of the annual segment disclosures. The definition of and method for determining reportable segments is unchanged. The new disclosure requirements will become effective for the Company’s fiscal 2025 annual financial statements. The Company is currently evaluating potential impacts ofthe newdisclosure requirements, but does not expect the guidance will have a material impact on its consolidated financial statements.

Note 2: Acquisitions and Dispositions

Acquisition of Napps Technology Corporation

On July 1, 2023, the Company acquired substantially all of the net operating assets of Napps Technology Corporation (“Napps”) for consideration totaling $5.8 million. The Company paid $4.8 million during the second quarter of fiscal 2024 and, based upon the terms of the agreement, expects to pay the remaining $1.0 million to the seller one year after closing.

Napps is a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps. This acquisition expands the Company’s indoor air quality product portfolio and supports its growth strategy and mission of improving indoor air quality. Napps has historical annual sales of approximately $5.0 million. Since the date of the acquisition, the Company has reported the financial results of the Napps business within the Climate Solutions segment.

For the December 31, 2023 condensed consolidated financial statements, the Company has allocated the purchase price to the identifiable tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values as of the acquisition date. The Company engaged a third-party valuation specialist to assist in determining the fair value of the acquired intangible assets. The valuation analysis considered the expected future cash flows of the acquired business. The Company recorded $2.9 million of intangible assets, including customer relationship and acquired technology assets. The Company is amortizing the acquired intangible assets using a weighted-average life of approximatelyten years. The Company allocated the excess of the purchase price over the net assets recognized to goodwill in the amount of $1.0 million, which is deductible for income tax purposes.

The Company’s allocation of the purchase price for its acquisition of Napps was as follows:

Disposition oftwo coatings facilities

On September 19, 2023, the Company soldtwo coatings facilities, located in California and Florida, to Protecall, LLC. These facilities provide aftermarket application services, in which HVAC units are sprayed with an anti-corrosion protective coating. The Company’s other coatings businesses continue to own and license its spray-applied coatings used in aftermarket applications and are strategically pursuing growth through product licensing arrangements. Prior to the disposition, the Company reported the financial results of these businesses within the Performance Technologies segment. In fiscal 2023, the net sales of thesetwo businesses totaled $6.4 million. As a result of this transaction, the Company wrote-off $0.7 million of goodwill attributable to the disposed businesses and recorded a gain on sale of less than $0.1 million during the second quarter of fiscal 2024.

Disposition ofthree Germany automotive businesses

On October 31, 2023, the Company sold three automotive businesses based in Germany (the “disposal group”) to affiliates of Regent, L.P. The Company expects that the sale of these businesses, which produce air- and liquid-cooled products for internal combustion diesel and gasoline engines for the European automotive market, will support its strategic prioritization of resources towards higher-margin technologies. The Company determined the disposal group did not qualify as a discontinued operation for reporting purposes under U.S. GAAP. As part of its evaluation, the Company considered anticipated future sales in Europe to automotive and other vehicular customers with similar product offerings and using similar heat-transfer technology within the Performance Technologies segment.

The net transaction price for the sale of the disposal group was less than $1.0 million. As a result of the sale, the Company recorded a $4.0 million gain on sale during the third quarter of fiscal 2024, primarily driven by the net liability position of the disposal group at the time of sale. In addition, the gain on sale includes the write-off of $0.6 million of net actuarial gains related to the disposal group’s pension plans. The Company reported the $4.0 million gain on the gain on sale of assets line within the consolidated statement of operations.

Prior to the disposition, the Company reported the financial results of the disposal group within its Performance Technologies segment. Net sales of the disposal group included within the Company’s consolidated statements of operations for the first nine months of fiscal 2024 and 2023 totaled $54.2 million and $54.8 million, respectively.

Note 3: Revenue Recognition

Disaggregation of revenue

The tables below present revenue for each of the Company’s operating segments. Each segment’s revenue is disaggregated by product group, by geographic location and based upon the timing of revenue recognition.

Beginning in fiscal 2024 and in connection with the Company’s strategic transformation and continued application of 80/20 principles across its businesses, the Company refined its reporting of disaggregated revenue within the Climate Solutions segment to be more consistent with how the segment has aligned its teams around three market-based verticals: i) heat transfer products; ii) HVAC & refrigeration; and iii) data center cooling. For the refined fiscal 2024 presentation, the Company reports revenue based upon the respective product lines and related customer relationships managed by each market-based vertical team. The disaggregated revenue information presented in the tables below for fiscal 2023 has been recast to be comparable with the fiscal 2024 presentation.

Contract balances

Contract assets and contract liabilities from contracts with customers were as follows:

Contract assets, included within other current assets in the consolidated balance sheets, primarily consist of capitalized costs related to customer-owned tooling contracts, wherein the customer has guaranteed reimbursement, and assets recorded for revenue recognized over time, which represent the Company’s rights to consideration for work completed but not yet billed. The $4.6 million decrease in contract assets during the first nine months of fiscal 2024 primarily resulted from a decrease in contract assets for revenue recognized over time.

Contract liabilities, included within other current liabilities in the consolidated balance sheets, consist ofcustomer deposits and other payments received in advance of satisfying performance obligations under customer contracts, including contracts for data center cooling products and customer-owned tooling. The $57.7 million increase in contract liabilities during the first nine months of fiscal 2024 primarily resulted from payments received in advance of the Company’s satisfaction of performance obligations, largely associated with contracts with long inventory lead times.

Note 4: 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:

When available, the Company uses quoted market prices to determine fair value and classifies such measurements as Level 1. In some cases, where market prices are not available, the Company uses observable market-based inputs to calculate fair value, in which case the measurements are classified as Level 2. If quoted or observable market prices are not available, the Company determines fair value based upon valuation models that use, where possible, market-based data such as interest rates, yield curves or currency rates. These measurements are classified as Level 3.

The carrying values of cash, cash equivalents, restricted cash, short-term investments, trade accounts receivable, accounts payable, and short-term debt approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt is disclosed in Note 17.

Note 5: Pensions

Pension cost included the following components:

The Company’s funding policy is to contribute annually, at a minimum, the 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 didnot make cash contributions to its U.S. pension plans during the first nine months of fiscal 2024. The Company expects to contribute $0.9 million to its U.S. pension plans during the fourth quarter of fiscal 2024.

Note 6: 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 authorizes grants of stock awards, stock options, and performance-based awards 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 awards 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 $3.1 million and $1.5 millionfor the three months ended December 31, 2023 and 2022, respectively. The Company recognized stock-based compensation expense of $7.7 million and $5.0 million for the nine months ended December 31, 2023 and 2022, respectively.

During the first nine months of fiscal 2024, the Company granted performance-based stock awards and restricted stock awards. The performance metrics for the performance-based stock 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 performance period ending March 31, 2026.

During the first nine months of fiscal 2023, the Company granted restricted stock awards, stock options, and performance cash awards.

The weighted-average fair value of stock-based compensation awards granted during the nine months ended December 31, 2023 and 2022 were as follows:

As of December 31, 2023, unrecognized compensation expense related to non-vested stock-based compensation awards, which will be recognized as expense over the remaining service periods, was as follows:

Note 7: Restructuring Activities

During the first nine months of fiscal 2024, restructuring and repositioning expenses primarily consisted of equipment transfer costs and severance expenses in the Climate Solutions and Performance Technologies segments. These restructuring activities are part of the Company’s transformational initiatives supported by 80/20 principles and include product line transfers intended to achieve production efficiency improvements in its manufacturing facilities and targeted headcount reductions in Europe and Asia.

During the first nine 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.

Restructuring and repositioning expenses were as follows:

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

The Company accrues severance in accordance with its written plans, procedures, and relevant statutory requirements. Changes in accrued severance were as follows:

Note 8: Other Income and Expense

Other income and expense consisted of the following:

Note 9: Income Taxes

The Company’s effective tax rate for the three months ended December 31, 2023 and 2022 was 18.6 percent and 25.6 percent, respectively. The Company’s effective tax rate for the nine months ended December 31, 2023 and 2022 was 21.6 percent and 23.8 percent, respectively. The effective tax rates for fiscal 2024 are lower than the prior year, primarily due to changes in the mix and amount of foreign and U.S. earnings. The effective tax rates for the fiscal 2024 periods were also favorably impacted by a $3.1 million tax benefit related to the sale ofthree automotive businesses based in Germany during the third quarter. See Note 2 for additional information regarding the sale. In addition, the effective tax rate for the first nine months of fiscal 2024 was favorably impacted by the release of a $1.8 million unrecognized tax benefit during the second quarter, due to a lapse in statute of limitations.

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 judgment 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.

At December 31, 2023, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $38.4 million and $16.3 million, respectively. 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 the U.S. and certain foreign jurisdictions, could necessitate the establishment of further valuation allowances.

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. In addition, the Company excludes the impact of operations anticipated to generate net operating losses for the full fiscal year from the overall effective tax rate calculation and instead records them discretely based upon year-to-date results. The Company does not anticipate a significant change in unrecognized tax benefits during the remainder of fiscal 2024.

Note 10: Earnings Per Share

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

There wereno anti-dilutive securities that impacted the calculation of diluted earnings per share for the three and nine months ended December 31, 2023.

For the three and nine months ended December 31, 2022, the calculation of diluted earnings per share excluded 0.1 million and 0.6 million stock options, respectively, because they were anti-dilutive. In addition, the calculation for the three and nine months ended December 31, 2022 excluded less than 0.1 million and 0.2 million restricted stock awards, respectively, because they were anti-dilutive.

Note 11: Cash, Cash Equivalents and Restricted Cash

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

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.

Note 12: Inventories

Inventories consisted of the following:

Note 13: Property, Plant and Equipment

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

Note 14: Goodwill and Intangible Assets

The following table presents a roll forward of the carrying value of goodwill from March 31, 2023 to December 31, 2023.

Intangible assets consisted of the following:

During the second quarter of fiscal 2024, the Company recorded customer relationship and acquired technology intangible assets totaling $2.9 million related to the Napps acquisition. See Note 2 for additional information.

The Company recorded amortization expense of $2.1 million and $2.0 millionfor the three months ended December 31, 2023 and 2022, respectively. The Company recorded amortization expense of $6.1 million and $6.0 million for the nine months ended December 31, 2023 and 2022, respectively. The Company estimates that it will record approximately $2.0 million of amortization expense during the remainder of fiscal 2024. The Company estimates that it will record approximately $8.0 million of annual amortization expense in fiscal 2025 through 2028 and approximately $7.0 million in fiscal 2029.

Note 15: Product Warranties

Changes in accrued warranty costs were as follows:

Note 16: Leases

Lease assets and liabilities

The following table provides a summary of leases recorded on the consolidated balance sheets.

Components of lease expense

The components of lease expense were as follows:

Note 17: Indebtedness

Long-term debt consisted of the following:

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

The Company maintains a credit agreement with a syndicate of banks that provides for a multi-currency $275.0 million revolving credit facility and U.S. dollar- and euro-denominated term loan facilities maturing in October 2027. In addition, the credit agreement provides for 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, 2023, the weighted-average interest rate for the term loans was 6.5 percent.

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. At December 31, 2023 and March 31,2023, the Company hadno outstanding borrowings under either its revolving credit or swingline facilities. As of December 31, 2023, domestic letters of credit totaled $5.6 million and, as a result, available borrowing capacity under the Company’s revolving credit facility was $269.4 million.

The Company also maintains credit agreements for its foreign subsidiaries. The outstanding short-term borrowings related to these foreign credit agreements totaled $3.7 million at March 31, 2023. There wereno short-term borrowings related to these agreements at December 31, 2023.

Indebtedness under the Company’s credit agreement and Senior Note agreements is secured by liens on substantially all domestic assets. These agreements also require compliance with various covenants that may limit the Company’s ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; and make restricted payments including dividends. In addition, the agreements may require prepayment in the event of certain asset sales.

Financial covenants within its credit agreements include a leverage ratio covenant, which 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 must also maintain a ratio of Adjusted EBITDA of at least three times consolidated interest expense. As of December 31, 2023, the Company was in compliance with its debt covenants.

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, 2023 and March 31, 2023, 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 $119.0 million and $125.9 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 4 for the definition of a Level 2 fair value measurement.

Note 18: Risks, Uncertainties, Contingencies and Litigation

Environmental

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 at its 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 $18.3 million and $17.6 million as of December 31, 2023 and March 31, 2023, respectively. During the third quarter of fiscal 2024, the Company increased its remediation accrual related to a former manufacturing facility in the U.S. by $1.0 million. As additional information becomes available regarding 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.

Note 19: Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows:

Note 20: Segment Information

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

The following is a summary of segment assets, comprised entirely of trade accounts receivable and inventories, and other assets:

Note 21: Subsequent Events

Purchase of TMGcore, Inc. intellectual property

In January 2024, the Company purchased intellectual property and other specific assets from TMGcore, Inc., a specialist in single- and two-phase liquid immersion cooling technology for data centers. The Company expects to utilize the liquid cooling immersion technology to support its growth strategy of expanding its global data center product offerings. The initial purchase price of the assets was $12.0 million. Additional contingent consideration may be payable to the seller in fiscal 2029. The amount of any additional consideration is dependent upon future financial metrics associated with the acquired technology. At this time, the Company cannot estimate the amount or range of additional consideration that may be payable to the seller in fiscal 2029.

Technical service center restructuring

In January 2024, the Company approved a plan to close a technical service center in Europe. The objective of this restructuring initiative is to optimize the Company’s utilization of its technical service center capacity and realign its cost structure in light of the recent sale ofthree automotive businesses in Germany. The Company is targeting to complete the closure during the first half of fiscal 2025. At this time, the Company has not determined the full restructuring plan, however, the Company preliminarily estimates that closure costs will total approximately $8.0 million to $12.0 million. This estimate is subject to change as management completes the restructuring plan. The Company anticipates that severance expenses associated with this restructuring initiative will be recorded during the fourth quarter of fiscal 2024.