MODINE MANUFACTURING CO (MOD) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

At Modine, we are Engineering a Cleaner, Healthier World ™.  We provide trusted products and technologies that help improve our world.  Our broad portfolio of systems and solutions
support our mission of improving indoor air quality, conserving natural resources, lowering harmful emissions, enabling cleaner running vehicles, and using environmentally friendly refrigerants.  We operate in
four continents, in 15 countries, and employ approximately 11,300 persons worldwide.

We sell innovative and environmentally responsible thermal management products and solutions to diversified customers in a wide array of commercial, industrial, and building HVAC&R markets.  In addition, we are a leading provider of
engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway OEM vehicular applications.  Our primary product groups include i) heat transfer; ii) HVAC & refrigeration; iii) data center cooling; iv)
air-cooled; v) liquid-cooled; and vi) advanced solutions.

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Company Strategy

Our purpose is to engineer a cleaner, healthier world by providing products and services that improve indoor air quality, reduce water and energy consumption, lower harmful emissions, enable cleaner running vehicles, and use environmentally
friendly refrigerants.

In fiscal 2023, we made significant progress toward transforming Modine.  We originally announced our vision for a “new” Modine in late fiscal 2021.  In fiscal 2022, we onboarded seasoned leaders to drive transformative change, including new
segment presidents for our Climate Solutions and Performance Technologies segments.  Since that time, we have simplified and segmented our organization, aligning teams, led by general managers, around specific strategies and market-based verticals
within our company.  Our new leadership teams have created a high-performance culture and are prioritizing resources on products and markets with the highest growth opportunities and best return profiles.  We have been focused on growth
opportunities in the data center market and have strategically expanded our product offerings in this business.  We are now manufacturing and selling more data center cooling products in North America.  We have also improved our commercial acumen
and have strengthened our business relationships with our best customers.  In addition, by applying 80/20 principles and improving our commercial pricing methodologies, we have improved our profit margins in fiscal 2023, in spite of significant
supply chain challenges and inflationary market conditions.

Entering fiscal 2024, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace, we are focused on organic and inorganic growth opportunities in the key markets we
serve and the incremental value we believe we can unlock in Modine by applying 80/20 principles across our businesses.  We are strengthening key customer relationships and pursing strategic growth opportunities, particularly in the data
center, electric vehicles, and HVAC&R markets where we see the best opportunities for profitable growth.  In addition, we are utilizing an 80/20 mindset within our manufacturing facilities and expect to achieve
production efficiency improvements as a result.

Our ultimate objective for our transformational strategy is to accelerate profitable growth.  We expect to change our mix of business, as we grow certain areas and strategically deemphasize others.  We expect these changes will fuel improvements
in both earnings and cash flow, all while supporting our customers with innovative and environmentally responsible thermal management solutions to succeed in the ever-changing global marketplace.

Development of New Products and Technology

Every day, we leverage our technical expertise, building on more than 100 years of excellence in thermal management, to advance our purpose.  We are dedicated to utilizing technology and solutions with sustainable
impacts.  Our ability to provide customizable solutions to meet the ever-evolving needs of our customers is one of our greatest competitive strengths.

We partner with our customers and use a systems-based approach to ensure our solutions work seamlessly with their other components.  Our thermal solutions enable our customers to stay ahead of new and emerging
regulations, particularly those involving increasingly stringent emissions, fuel economy, and energy efficiency standards.

We maintain numerous state-of-the-art technology centers, dedicated to the development and testing of products and technologies.  The centers are located in Racine, Wisconsin; Leeds, United Kingdom; Grenada, Mississippi;
Pocenia, Italy; and Bonlanden, Germany.  Customers know our reputation for innovation and rely on Modine to provide high quality products and technologies.

Strategic Planning and Corporate Development

We employ both short-term (one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market
challenges.

We devote significant resources to global strategic planning and development activities to strengthen our competitive position.  We will continue to pursue organic- and external-growth opportunities,
particularly to grow our global, market leading positions in the HVAC&R and data center markets.  In addition, we have a dedicated team focused on products and solutions for electric vehicles, supporting demands for climate-friendly alternative
powertrains.  We have provided our general managers with the tools that they need to be successful, including dedicated resources to create an entrepreneurial environment and to challenge the status quo.

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Operational and Financial Discipline

We are using 80/20 principles to guide our path forward toward commercial excellence.  Through closely analyzing our customer and product data with our 80/20 mindset, we
focus our commercial and operational actions in areas that drive our profitability and also in areas requiring improvement.  Our Climate Solutions and Performance Technologies segments have strategically aligned their teams around their
primary market-based verticals and are driving transformative change.  The general manager for each vertical is working toward strategic objectives specifically tailored to his or her business and we expect these strategies will continue to
generate earnings and cash flow improvements.

While executing on our strategic initiatives, we have faced obstacles including supply chain disruptions and inflationary market conditions.  We have and will continue to address these challenges head-on through
commercial actions and close engagement with our suppliers.

Our fiscal 2023 annual cash incentive plan for our management team was based upon two performance metrics: growth in net earnings before interest, taxes, depreciation, amortization, and certain other
adjustments (“Adjusted EBITDA”) and Adjusted EBITDA margin as a percentage of net sales.  The incentive plan’s performance goals were established for each operating segment as well for the consolidated company.  In
addition, we provide a long-term incentive compensation plan for officers and certain key leaders throughout our organization to attract, retain, and motivate these employees who are responsible for driving the long-term success of our company.
The plan is comprised of stock awards, stock options, and performance-based awards.  The performance-based awards for the fiscal 2023 through 2025 performance period are based upon a target three-year average
growth in Adjusted EBITDA and a target three-year average cash flow return on invested capital.

Segment Information – Strategy, Market Conditions and Trends

Each of our operating segments is managed by a segment president and has separate strategic and financial plans and financial results which are reviewed by our chief operating decision maker.  These plans and results are used by management to
evaluate the performance of each segment and to make decisions on the allocation of resources.

Effective April 1, 2022, we began managing the Company under two operating segments, Climate Solutions and Performance Technologies.  Our segment structure aligns businesses serving similar or complimentary end markets, products and technologies
under common segment management.  This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to optimize profit
margins and cash flow.

The Climate Solutions segment includes the previously-reported BHVAC and 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 Coatings business.

Climate Solutions (43 percent of fiscal 2023 net sales)

Our Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide array of applications.  The Climate Solutions segment sells heat transfer, HVAC & refrigeration, and data
center cooling solutions to customers in North America, EMEA, and Asia.  Heat transfer products include heat transfer coils used in commercial and residential HVAC and refrigeration applications.  HVAC & 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, CRAC and CRAH units, and fan walls.  We sell our products and solutions both directly to commercial and industrial OEM and end user customers and through wholesalers, distributors,
consulting engineers, contractors and data center operators for applications such as data centers, schools, greenhouses, healthcare systems, warehouses, residential garages, manufacturing facilities, and other commercial and industrial
applications.

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During fiscal 2023, Climate Solutions segment sales increased compared with the prior year, primarily driven by increased sales of data center cooling, heat transfer, and HVAC & refrigeration products.  We applied
80/20 principles to each of our businesses within the Climate Solutions segment during fiscal 2023.  For example, we simplified our heat transfer products business by reducing SKUs and have refined our pricing discipline.  Through these efforts, we
achieved improvements in the Climate Solutions segment’s profit margins.  In addition, as part of our strategic growth initiatives, we have expanded our data center business and are manufacturing and selling more data center cooling products in
North America.

Looking ahead, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace, we expect growth across the HVAC&R and data center markets we serve during fiscal 2024.
These markets are heavily impacted by construction activity, building regulations, owner/occupant comfort requirements, and the increasing reliance on digital technologies.  We expect particularly strong growth in the data center markets as the
need for digital infrastructure expands.  We also expect the North American school and commercial HVAC markets, to which we sell our indoor air quality products, will experience strong growth during fiscal 2024, driven by federal and local funding
for ventilation improvements for schools.  In addition, we expect the rapid adoption of heat pump technology in Europe to be a market growth driver and are increasing our manufacturing capacity in response.

In fiscal 2024, we will continue to utilize an 80/20 mindset across our Climate Solutions businesses.  We are focused on engaging with key customers to further develop our relationships with them and are pursuing
strategic growth opportunities, particularly for our data center, heating, and indoor air quality products.  We are also focused on growing our refrigeration sales and believe we can become a market leader in more environmentally friendly carbon
dioxide gas coolers and adiabatic solutions in North America and Europe.  In addition to these organic growth opportunities, we plan to pursue acquisitions to further accelerate growth and complement our existing product portfolio.  Finally, we are
also focused on applying the 80/20 principles within our manufacturing facilities and expect to achieve production efficiency improvements as a result.

Performance Technologies (57 percent of fiscal 2023 net sales)

The Performance Technologies segment provides products and solutions 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.  Air-cooled products consist primarily of powertrain cooling products, such
as radiators, condensers, engine cooling modules, charge air coolers, fan shrouds, and surge tanks.  Liquid-cooled products include engine oil coolers, EGR coolers, liquid charge air coolers, transmission and retarder oil coolers, fuel coolers, and
condensers.  In addition, the Performance Technologies segment provides advanced solutions, 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.

During fiscal 2023, Performance Technologies segment sales increased compared with the prior year, primarily driven by higher sales volume and favorable commercial pricing, including adjustments in response to material price increases.  Compared
with the prior year, sales of air-cooled, liquid-cooled, and advanced solutions products each increased.  In fiscal 2023, we focused on training our employees on 80/20 principles and began applying them to our businesses.

Looking ahead, while a level of uncertainty and the possibility of recessionary conditions exist in the global marketplace,  we are excited about the growth potential in our key markets and the benefits we
expect to achieve as we roll out 80/20 principles across all of our businesses.  Our Advanced Solutions team is focused on growing sales of its thermal management systems and components for electric vehicles and is engaged with numerous
current and prospective customers.  We believe government policies in the U.S. and Europe will drive customer investments in electric and alternative powertrains and will support market growth in this area.  In addition, we expect the global
automotive markets to experience moderate growth, as customers look to replenish inventory levels in light of the semiconductor chip shortage and other supply chain challenges.  We are also working to apply our 80/20 mindset to achieve
manufacturing efficiencies and to improve our business mix, focusing on higher profit margin products, applying quoting filters for new customer programs and reducing complexity across our businesses.

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Consolidated Results of Operations

Supply Chain Disruptions and Inflationary Market Conditions

Market and economic dynamics, including the impacts of the military conflict between Russia and Ukraine and the COVID-19 pandemic, have contributed to global supply chain challenges and inflationary market conditions.  We are focused on
mitigating the negative impacts of labor shortages, supply chain challenges and inflationary market conditions, including changes in raw material, energy, logistic, and interest costs, as well as delays and shortages in certain purchased
commodities and components.  We have implemented selling price increases for many of our products in response to raw material and other cost increases and are engaged with suppliers to ensure availability of key raw materials.  We cannot reasonably
estimate the full impact that economic and market dynamics will have on our business, results of operations, or cash flows in the future.

Fiscal 2023 Highlights

Fiscal 2023 net sales increased $248 million, or 12 percent, from the prior year, primarily due to higher sales in our Performance Technologies and Climate Solutions segments.  Cost of sales increased $168 million, or 10 percent, 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 increased $80 million and gross margin improved 180 basis points to 16.9
percent.  SG&A expenses increased $19 million, primarily due to higher compensation-related expenses.  Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to higher gross profit,
partially offset by the absence of a $56 million net impairment reversal recorded in the prior year that primarily related to the liquid-cooled automotive business.  Upon the termination of a sale agreement with the prospective buyer during the
third quarter of fiscal 2022, the liquid-cooled automotive business reverted back to held and used classification.  See Note 2 of the Notes to Consolidated Financial Statements for further information regarding the liquid-cooled automotive
business, which was classified as held for sale during the first seven months of fiscal 2022.

Fiscal 2022 Highlights

Fiscal 2022 net sales increased $242 million, or 13 percent, from the prior year, primarily due to higher sales in our Climate Solutions and Performance Technologies segments.  Cost of sales increased $226 million, or 15 percent, from the prior
year primarily due to higher raw material prices and higher sales volume.  Gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.  SG&A expenses increased $4 million, primarily due to higher
compensation-related expenses, as the prior-year benefitted from cost-saving actions implemented in response to the COVID-19 pandemic.  Operating income of $119 million during fiscal 2022 represents a $217 million improvement from the prior-year
operating loss of $98 million.  The operating income and operating loss during fiscal 2022 and 2021 include a $56 million net impairment reversal and $167 million of impairment charges, respectively, primarily related to the automotive businesses
that were held for sale.

The following table presents our consolidated financial results on a comparative basis for fiscal years 2023, 2022 and 2021.

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Year Ended March 31, 2023 Compared with Year Ended March 31, 2022

Fiscal 2023 net sales of $2,298 million were $248 million, or 12 percent, higher than the prior year, primarily due to higher sales volume in both of our segments and favorable commercial pricing, including adjustments in response to raw
material price increases.  These increases were partially offset by a $111 million unfavorable impact of foreign currency exchange rates.  Sales in the Performance Technologies and Climate Solutions segments increased $144 million and $101 million,
respectively.

Fiscal 2023 cost of sales of $1,909 million increased $168 million, or 10 percent, primarily due to higher sales volume and higher raw material prices, which increased $34 million.  These increases were partially offset by a $95 million
favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales decreased 180 basis points to 83.1 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 lower cost of sales as a percentage of sales, fiscal 2023 gross profit increased $80 million and gross margin improved 180 basis points to 16.9 percent.

Fiscal 2023 SG&A expenses increased $19 million, yet decreased 30 basis points as a percentage of sales.  The higher SG&A expenses were primarily driven by higher compensation-related expenses, which increased $20 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 inflationary market conditions.  These increases were partially offset by an
$8 million favorable impact of foreign currency exchange rates.  In addition, strategic reorganization costs, costs associated with our review of strategic alternatives for our automotive businesses, and environmental charges related to a
previously-closed manufacturing facility in the U.S., which are each recorded at Corporate, decreased $3 million, $2 million, and $2 million, respectively, during fiscal 2023 compared with the prior year.

Restructuring expenses of $5 million in fiscal 2023 decreased $19 million compared with the prior year, primarily due to lower severance-related expenses in the Performance Technologies segment.

The net impairment reversal of $56 million during fiscal 2022 primarily related to the liquid-cooled automotive business.   In connection with the termination of the agreement to sell this business in the third quarter of fiscal 2022, we
reversed a significant amount of previously-recorded impairment charges within the Performance Technologies segment.

We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.

Operating income of $150 million during fiscal 2023 increased $31 million from the prior year, primarily due to an $80 million increase in gross profit, a $19 million decrease in restructuring expenses, and the absence of the $7 million loss on
the sale of the Austrian air-cooled automotive business in the prior year.  These drivers, which favorably impacted operating income in fiscal 2023, were partially offset by the absence of the $56 million net impairment reversal recorded in the
prior year and higher SG&A expenses.

Interest expense in fiscal 2023 increased $5 million compared with the prior year, primarily due to unfavorable changes in interest rates.  In addition, we amended and extended our U.S. credit agreement that provides for a multi-currency
revolving credit facility and U.S. dollar- and euro- denominated term loans maturing in October 2027, along with shorter-duration swingline loans.  In connection with this credit agreement modification, we recorded $1 million of costs as interest
expense during fiscal 2023.

The benefit for income taxes was $28 million in fiscal 2023, compared with a provision for income taxes of $15 million in fiscal 2022.  The $43 million change was primarily due to a $57 million income tax benefit recorded in the current year
related to the reversal of the valuation allowance on certain deferred tax assets in the U.S., partially offset by the absence of a net $11 million income tax benefit related to valuation allowances on deferred tax assets in foreign jurisdictions
in the prior year.

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Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Fiscal 2022 net sales of $2,050 million were $242 million, or 13 percent, higher than the prior year, primarily due to higher sales volume in each of our segments, and favorable commercial pricing, including adjustments in response to raw
material price increases.  Sales in the Climate Solutions and Performance Technologies segments increased $180 million and $63 million, respectively.

Fiscal 2022 cost of sales of $1,741 million increased $226 million, or 15 percent, primarily due to higher raw material prices, which increased $148 million, and higher sales volume.  In addition, cost of sales in fiscal 2021 was favorably
impacted by cost-saving actions taken in response to the COVID-19 pandemic.  These factors, which caused an increase in cost of sales compared with the prior year, were partially offset by lower depreciation expense in the Performance Technologies
segment and improved operating efficiencies.  As a percentage of sales, cost of sales increased 110 basis points to 84.9 percent.

As a result of higher sales and higher cost of sales as a percentage of sales, fiscal 2022 gross profit increased $16 million and gross margin declined 110 basis points to 15.1 percent.

Fiscal 2022 SG&A expenses increased $4 million.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, as the prior year was favorably 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 million.  These increases were partially offset by lower costs related to our review of strategic
alternatives for the automotive businesses and lower strategic reorganization costs, which decreased $4 million and $3 million, respectively.  The lower strategic reorganization costs primarily resulted from lower severance expenses for executive
management positions.

Restructuring expenses of $24 million in fiscal 2022 increased $11 million compared with the prior year, primarily due to higher severance-related expenses in the Performance Technologies segment, partially offset by lower severance-related
expenses in the Climate Solutions segment.

In fiscal 2021, we recorded $167 million of impairment charges to write down the long-lived assets in the liquid-cooled and Austrian air-cooled automotive businesses when they were classified as held for sale.  In fiscal 2022, we adjusted the
long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value once they no longer met the held for sale classification criteria and, as a result, recorded a net impairment reversal of $56 million.

We sold our Austrian air-cooled automotive business on April 30, 2021.  As a result of the sale, we recorded a $7 million loss on sale at Corporate during fiscal 2022.

Operating income of $119 million during fiscal 2022 represents an improvement of $217 million from the prior-year operating loss of $98 million.  The operating income and operating loss during fiscal 2022 and 2021 included the significant
impairment reversal and impairment charges within the Performance Technologies segment.  In addition, as compared with the prior year, the fiscal 2022 operating income was favorably impacted by higher gross profit.  Operating income was negatively
impacted by higher restructuring expenses, the loss on sale of the Austrian air-cooled automotive business, and higher SG&A expenses.

The provision for income taxes was $15 million and $90 million in fiscal 2022 and 2021, respectively.  The $75 million decrease was primarily due to the absence of $117 million of income tax charges recorded in fiscal 2021 to increase the
valuation allowances on deferred tax assets in the U.S. and in certain foreign jurisdictions and a net $11 million income tax benefit recorded in fiscal 2022 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 income tax benefits totaling $47 million recorded in the prior year, including $38 million related to the impairment charges recorded for the held for
sale automotive businesses and $9 million resulting from the allocation of the income tax provision between net earnings and other comprehensive income.

Segment Results of Operations

Effective April 1, 2022, we began 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.  This simplified segment structure allows us to better focus resources on targeted growth opportunities and better enables an efficient application of 80/20 principles across all product lines to
optimize profit margins and cash flow.

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The Climate Solutions segment includes the previously-reported BHVAC and 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 Coatings business.

The segment realignment had no impact on our consolidated financial position, results of operations, and cash flows.  We have recast the segment financial information for fiscal 2022 and 2021 to conform to the fiscal 2023 presentation.

Climate Solutions

Year Ended March 31, 2023 Compared with Year Ended March 31, 2022

Climate Solutions net sales increased $101 million, or 11 percent, in fiscal 2023 compared with the prior year, primarily due to higher sales volume and favorable commercial pricing.  These increases were partially offset by a $52 million
unfavorable impact of foreign currency exchange rates.  Compared with the prior year, sales of data center cooling, heat transfer, and HVAC & refrigeration products increased $58 million, $33 million, and $11 million, respectively.

Climate Solutions cost of sales increased $44 million, or 6 percent, in fiscal 2023, primarily due to higher sales volume, partially offset by a $44 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of
sales decreased 380 basis points to 77.9 percent, primarily due to the favorable impact of higher sales volume, favorable commercial pricing, and improved operating efficiencies, partially offset by higher labor and inflationary costs.

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $58 million and gross margin improved 380 basis points to 22.1 percent.

Climate Solutions SG&A expenses increased $7 million compared with the prior year, yet decreased 30 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to a $5 million increase in compensation-related
expenses, including commission expenses, and increases in other general and administrative expenses that have been impacted by inflationary market conditions.  These increases were partially offset by a $4 million favorable impact of foreign
currency exchange rate changes.

Restructuring expenses totaling $2 million during fiscal 2023 were consistent with the prior year and primarily consisted of severance-related expenses.

Operating income in fiscal 2023 increased $51 million to $124 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Climate Solutions net sales increased $180 million, or 25 percent, in fiscal 2022 compared with the prior year, primarily due to higher sales volume and, to a lesser extent, favorable commercial pricing, including adjustments in response to raw
material price increases.  Sales of heat transfer, HVAC & refrigeration, and data center cooling products increased $101 million, $46 million, and $32 million, respectively.

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Climate Solutions cost of sales increased $149 million, or 25 percent, in fiscal 2022, primarily due to higher sales volume and higher raw material prices, which increased $67 million.  As a percentage of sales, cost of sales increased 40 basis
points to 81.7 percent, primarily due to higher material costs, partially offset by favorable impacts of higher sales volume and improved operating efficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $29 million and gross margin declined 40 basis points to 18.3 percent.

Climate Solutions SG&A expenses increased $8 million compared with the prior year, yet decreased 130 basis points as a percentage of sales.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which
increased $6 million and included higher commission expenses.

Restructuring expenses during fiscal 2022 decreased $3 million, primarily due to lower severance expenses.  The fiscal 2022 severance expenses primarily related to targeted headcount reductions in Europe and China.  The fiscal 2021 severance
expenses primarily related to plant consolidation activities in China and targeted headcount reductions in North America.

Operating income in fiscal 2022 of $73 million increased $23 million, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Performance Technologies

Year Ended March 31, 2023 Compared with Year Ended March 31, 2022

Performance Technologies net sales increased $144 million, or 12 percent, in fiscal 2023 compared with the prior 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 $59 million unfavorable impact of foreign currency exchange rates and, to a lesser extent, the absence of sales from the Austrian air-cooled automotive business, which we sold on April 30,
2021.  Sales of air-cooled, liquid-cooled, and advanced solutions products increased $86 million, $36 million, and $25 million, respectively.

Performance Technologies cost of sales increased $120 million, or 12 percent, primarily due to higher sales volume and higher raw material prices, which increased $29 million.  In addition, to a lesser extent, higher labor costs and higher
depreciation expenses negatively impacted cost of sales.  During fiscal 2022, we did not depreciate the held for sale property, plant and equipment assets within the liquid-cooled automotive business until they reverted back to held and used
classification during the third quarter of fiscal 2022.  These increases were partially offset by a $52 million favorable impact of foreign currency exchange rates.  As a percentage of sales, cost of sales decreased 50 basis points to 87.4 percent,
primarily due to the favorable impact of higher sales volume and commercial pricing, partially offset by higher material, labor and inflationary costs.

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $24 million and gross margin improved 50 basis points to 12.6 percent.

Performance Technologies SG&A expenses decreased $1 million compared with the prior year.  As a percentage of sales, SG&A expenses decreased by 100 basis points.  The decrease in SG&A expenses was primarily due to a $4 million
favorable impact of foreign currency exchange rate changes and, to a lesser extent, lower compensation-related expenses, partially offset by higher general and administrative expenses that have been impacted by inflationary market conditions.

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Restructuring expenses during fiscal 2023 totaled $3 million, a decrease of $19 million compared with the prior year.  This decrease was primarily driven by lower severance expenses in Europe for targeted headcount reductions.

The net impairment reversal of $56 million in fiscal 2022 primarily related to assets in our liquid-cooled automotive business.  See Note 2 of the Notes to Consolidated Financial Statements for further information.

Operating income in fiscal 2023 decreased $11 million to $66 million, primarily due to the absence of the significant net impairment reversal recorded in the prior year, partially offset by higher gross profit and lower restructuring expenses.

Year Ended March 31, 2022 Compared with Year Ended March 31, 2021

Performance Technologies net sales increased $63 million, or 6 percent, in fiscal 2022 compared with the prior year, primarily due to favorable commercial pricing, including adjustments in response to raw material price increases, and to a
lesser extent, higher sales volume.  In regard to the higher sales volume, sales in the prior year were negatively impacted by the COVID-19 pandemic in fiscal 2021.  Sales increased in fiscal 2022 to off-highway and commercial vehicle customers, as
those underlying markets recovered.  Sales to automotive customers, however, decreased in fiscal 2022, primarily due to $58 million of lower sales from our Austrian air-cooled automotive business, which we sold in the first quarter of fiscal 2022,
and the negative impacts of the semiconductor chip shortage on the global automotive market.  Compared with the prior year, sales of air-cooled and advanced solutions products increased $52 million and $21 million, respectively.  Sales of
liquid-cooled products decreased $11 million.

Performance Technologies cost of sales increased $78 million, or 8 percent, primarily due to higher raw material prices, which increased $81 million, and to a lesser extent, higher sales volume. These drivers, which increased cost of sales, were
partially offset by lower depreciation expenses in the segment’s automotive businesses, which decreased $9 million.  We ceased depreciating the property, plant and equipment assets within the liquid-cooled and Austrian 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.  As a percentage of sales, cost of sales increased 210 basis points to 87.9 percent, primarily due to the higher material prices.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit decreased $15 million and gross margin declined 210 basis points to 12.1 percent.

Performance Technologies SG&A expenses increased $6 million compared with the prior year.  The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $7 million, partially
offset by lower development and other administrative costs.

Restructuring expenses during fiscal 2022 totaled $22 million, an increase of $15 million compared with the prior year.  The increase was primarily driven by higher severance expenses in Europe related to targeted headcount reductions.

The fiscal 2022 net impairment reversal of $56 million primarily related to assets in our liquid-cooled automotive business.  We remeasured the previously impaired long-lived assets within the liquid-cooled automotive business to the lower of
their carrying or fair value once they were no longer held for sale.  The fiscal 2021 impairment charges totaling $167 million related to assets in the liquid-cooled and Austrian air-cooled automotive businesses, which were first classified as held
for sale in fiscal 2021.  See Note 2 of the Notes to Consolidated Financial Statements for further information.

Operating income of $77 million during fiscal 2022 represents a $186 million improvement from the prior-year operating loss of $109 million.  The operating income and operating loss during fiscal 2022 and 2021 were largely driven by the
significant net impairment reversal and impairment charges, respectively.  In addition, as compared with the prior year, operating income was unfavorably impacted by lower gross profit and higher restructuring expenses.

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Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of March 31, 2023 of $67 million, and an available borrowing capacity of $270 million under our revolving credit facility.  Given our
extensive international operations, approximately $63 million of our cash and cash equivalents are held by our non-U.S. subsidiaries.  Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be
subject to foreign withholding taxes if repatriated.  We 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.

Our primary contractual obligations include pension obligations, debt and related interest payments, lease obligations, and obligations for capital expenditures.  Our pension liabilities totaled $42 million as of March 31, 2023.  As a result of
funding relief provisions within the American Rescue Plan Act of 2021, we do not expect to make cash contributions to our U.S. pension plans during fiscal 2024.

Net Cash Provided by Operating Activities

Net cash provided by operating activities in fiscal 2023 was $108 million, an increase of $96 million from $12 million in the prior year.  This increase in operating cash flow was primarily due to the favorable impact of higher earnings and
favorable net changes in working capital, as compared with the prior year.  While inventories have increased $44 million from the prior year, the increase has been less significant than the increase in the prior year.  In fiscal 2023, the Company
increased its inventory levels, particularly in the Climate Solutions segment, to meet planned production increases.  In fiscal 2022, the higher inventory levels largely resulted from increased raw material prices and impacts from global supply
constraints and challenges, which continued 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 prior year.

Net cash provided by operating activities in fiscal 2022 was $12 million, a decrease of $138 million from $150 million in the prior year.  This decrease in operating cash flow was primarily due to unfavorable net changes in working capital,
including higher inventory and accounts receivable levels and higher payments for incentive compensation and employee benefits as compared with the prior year.  Inventory increased $61 million from March 31, 2021 to March 31, 2022.

Capital Expenditures

Capital expenditures of $51 million during fiscal 2023 increased $11 million compared with fiscal 2022.  Our capital spending in fiscal 2023 in the Performance Technologies and Climate Solutions segments totaled $25 million and $24 million,
respectively.  Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.  Capital spending in the Climate Solutions segment include investments
supporting our strategic growth initiatives, including expanding our data center business.

Debt

In October 2022, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $275 million revolving credit facility and term loan facilities maturing in October 2027.  This credit agreement
modified our then existing $250 million revolver and term loan facilities, which would have matured in June 2024.

Our total debt outstanding decreased $25 million to $353 million at March 31, 2023 compared with the prior year, primarily due to repayments during fiscal 2023.

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant, which are discussed further below.  Indebtedness under our credit agreements is
secured by liens on substantially all domestic assets.  These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in
certain transactions with affiliates; or make restricted payments including dividends.  Also, the credit agreements may require prepayments in the event of certain asset sales.

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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 March 31, 2023, we were in compliance with our debt covenants.  We expect to remain in compliance with our debt covenants during fiscal 2024 and beyond.

See Note 17 of the Notes to Consolidated Financial Statements for additional information regarding our credit agreements.

Share Repurchase Program

During fiscal 2023, we repurchased $7 million of our common stock.  As of March 31, 2023, we had $45 million of authorized share repurchases remaining under our current repurchase program, which expires in November 2024.  Our decision whether
and to what extent to repurchase additional shares depends on a number of factors, including business conditions, other cash priorities, and stock price.

Critical Accounting Policies

The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements.  Application of these policies results in accounting estimates that have the greatest
potential for a significant impact on our financial statements.  The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial
Statements.  In addition, recently issued accounting pronouncements that either have or could materially impact our financial statements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.

Revenue Recognition

We recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time.  The majority of our
revenue is recognized at a point in time, based upon shipment terms.  A limited number of our customer contracts provide an enforceable right to payment for performance completed to date.  For these contracts, we recognize revenue over time based
upon our estimated progress toward the satisfaction of the contract’s performance obligations.  We record an allowance for credit losses and we accrue for estimated warranty costs at the time of sale.  We base these estimates upon historical
experience, current business trends and economic conditions, and risks specific to the underlying accounts receivable or warranty claims.

Impairment of Long-Lived Assets

We perform impairment evaluations of long-lived assets, including property, plant and equipment and intangible assets, whenever business conditions or events indicate that those assets may be impaired.  We consider factors such as operating
losses, declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis.  In the event the net asset values exceed undiscounted cash flows expected to be generated by the assets, we write down the assets
to fair value and record an impairment charge.  We estimate fair value in various ways depending on the nature of the underlying assets.  Fair value is generally based upon appraised value, estimated salvage value, or selling prices under
negotiation, as applicable.

The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $315 million and $81 million, respectively, at March 31, 2023.  Within property, plant and
equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment.  Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, the majority of which
are related to our Climate Solutions segment.  We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level.  We monitor manufacturing plant financial performance to determine
whether indicators exist that would require an impairment evaluation for the facility.  This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes
in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy.  When such indicators are present, we perform an impairment evaluation.

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During fiscal 2022, we recorded a net impairment reversal of $56 million, primarily related to assets that were held for sale in the Performance Technologies segment.  In fiscal 2021, we recorded $167 million of impairment charges to write down
the long-lived assets in the liquid- and air-cooled automotive businesses when they were classified as held for sale.  In fiscal 2022, we adjusted the long-lived assets in the liquid-cooled automotive business to the lower of carrying or fair value
when they no longer met the held for sale classification criteria.  See Note 2 of the Notes to the Consolidated Financial Statements for additional information.

Impairment of Goodwill

We perform goodwill impairment tests annually, as of March 31, unless business events or other conditions exist that require a more frequent evaluation.  We consider factors such as operating losses, declining financial and market outlooks, and
market capitalization when evaluating the necessity for an interim impairment analysis.  We test goodwill for impairment at a reporting unit level.  Goodwill resulting from recent acquisitions generally represents the highest risk of impairment,
which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance.  We test goodwill for impairment by comparing the fair value of each reporting unit with its carrying value.
We determine the fair value of a reporting unit based upon the present value of estimated future cash flows.  If the fair value of a reporting unit exceeds the carrying value of the reporting unit’s net assets, goodwill is not impaired.  However,
if the carrying value of the reporting unit’s net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit’s carrying value exceeds its fair value.

Determining the fair value of a reporting unit involves judgment and the use of estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows
and risk-adjusted discount rates.  We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our
expectations of future business performance.  The discount rates used in determining discounted cash flows are rates corresponding to our cost of capital, adjusted for country- and business-specific risks where appropriate.  While we believe the
assumptions used in our goodwill impairment tests are appropriate and result in a reasonable estimate of the fair value of each reporting unit, future events or circumstances could have a potential negative effect on the estimated fair value of our
reporting units.  These events or circumstances include lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and continued inflationary market conditions,
including the impacts associated with the military conflict in Ukraine and the COVID-19 pandemic.  We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.

At March 31, 2023, our goodwill totaled $166 million related to our Climate Solutions and Performance Technologies segments.  We conducted goodwill impairment tests as of March 31, 2023 by applying a fair value-based test and determined the fair
value of the reporting units in each of our operating segments exceeded their respective book value.  A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion.

Acquisitions

From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position.  We allocate the purchase price of acquired businesses to the identifiable tangible and intangible
assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date.  We determine the estimated fair values using information available to us and engage third-party valuation specialists
when necessary.  The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments.  While we use our best estimates and assumptions, our estimates are inherently
uncertain and subject to refinement.  As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to
goodwill.  Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations.  We
also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods.  We periodically review the estimated useful lives assigned to our intangible assets to determine whether such
estimated useful lives continue to be appropriate.

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Pension Obligations

Our calculation of the expense and liabilities of our pension plans is dependent upon various assumptions.  At March 31, 2023, our pension liabilities totaled $42 million.  The most significant assumptions include the discount rate, long-term
expected return on plan assets, and mortality rates.  We base our selection of assumptions on historical trends and economic and market conditions at the time of valuation.  In accordance with U.S. GAAP, actual results that differ from these
assumptions are accumulated and amortized over future periods.  These differences impact future benefit cost.  Our domestic pension plans are closed to new participants; therefore, participants in these plans are not accruing benefits based upon
their current service as the plans do not include increases in annual earnings or for future service in calculating the average annual earnings and years of credited service under the pension plan formula.

For the following discussion regarding sensitivity of assumptions, all amounts presented are in reference to our domestic pension plans, since our domestic plans comprise all of our pension plan assets and the majority of our pension plan
expense.

To determine the expected rate of return on pension plan assets, we consider such factors as (a) the actual return earned on plan assets, (b) historical rates of return on the various asset classes in the plan portfolio, (c) projections of
returns on those asset classes, (d) the amount of active management of the assets, (e) capital market conditions and economic forecasts, and (f) administrative expenses paid with the plan assets.  The long-term rate of return utilized in fiscal
2023 and 2022 was 7.0 percent and 7.5 percent, respectively.  For fiscal 2024, we have assumed a rate of 6.5 percent.  A change of 25 basis points in the expected rate of return on assets would impact our fiscal 2024 pension expense by less than $1
million.

The discount rate reflects rates available on long-term, high-quality fixed-income corporate bonds on the measurement date of March 31.  For fiscal 2023 and 2022, for purposes of determining pension expense, we used a discount rate of 3.9 and
3.2 percent, respectively.  We determined these rates based upon a yield curve that was created following an analysis of the projected cash flows for our plans.  See Note 18 of the Notes to Consolidated Financial Statements for additional
information.  A change in the assumed discount rate of 25 basis points would impact our fiscal 2024 pension expense and projected benefit obligation by less than $1 million and approximately $4 million, respectively.

Income Taxes

We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities.  Due to the application of complex and sometimes ambiguous tax laws and rulings in the
jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions.  Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities
could challenge certain positions.

Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes.  We adjust these amounts to reflect changes in tax rates expected to be in effect when
the temporary differences reverse.  We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized.  This determination, which is made on a legal
entity-by-legal entity basis, involves judgment and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.  We believe the assumptions that we used are appropriate and result
in a reasonable determination regarding the future realizability of deferred tax assets.  However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in
certain jurisdictions, could cause us to record additional valuation allowances.

See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.

Loss Reserves

We maintain liabilities and reserves for a number of loss exposures, including environmental remediation costs, product warranties, self-insurance costs, estimated credit losses associated with trade receivables, regulatory compliance matters,
and litigation.  Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability.  We estimate these reserve requirements by using consistent and suitable
methodologies for the particular type of loss reserve being calculated.  See Notes 15 and 20 of the Notes to Consolidated Financial Statements for additional information regarding product warranties and contingencies and litigation, respectively.

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Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 7. 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 this
report and identified in our other public filings with the U.S. Securities and Exchange Commission.  Other risks and uncertainties include, but are not limited to, the following:

Market Risks:

Operational Risks:

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Strategic Risks:

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Financial Risks:

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