MODINE MANUFACTURING CO Income Taxes Disclosure

Note 8:  Income Taxes

The U.S. and foreign components of earnings before income taxes and the provision or benefit for income taxes consisted of the following:

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The reconciliation between the U.S. federal statutory rate and the Company’s effective tax rate was as follows:

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The Company’s effective tax rate in fiscal 2025 was higher than the prior year, primarily due to the absence of a $3.1 million tax benefit recorded in fiscal 2024 related to the sale of three automotive businesses based in Germany and an unfavorable impact of foreign currency exchange rates, partially offset by changes in the mix and amount of foreign and U.S. earnings. The $3.1 million tax benefit in fiscal 2024 is presented within the dividends and taxable foreign inclusions line in the table above; see Note 2 for information regarding the sale of the three automotive businesses. The Company’s fiscal 2023 effective tax rate was favorably impacted by an income tax benefit related to the reversal of a valuation allowance on deferred tax assets in the U.S, as described below.

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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.

Based upon its analyses during fiscal 2025 and 2024, the Company recorded net increases to deferred tax asset valuation allowances totaling $0.9 million and $5.4 million, respectively. Based upon its analyses during fiscal 2023, the Company reversed the valuation allowance related to certain deferred tax assets in the U.S. and, as a result, recorded an income tax benefit of $57.3 million. The Company had previously maintained a full valuation allowance against net deferred tax assets in the U.S. since fiscal 2021. During fiscal 2023, the Company determined it was more likely than not that these deferred tax assets in the U.S. would be realized after consideration of both positive and negative objectively verifiable evidence. The Company placed substantial weight on its fiscal 2022 and 2023 earnings, which resulted in a significant cumulative three-year income position. The Company also considered forecasted future earnings in certain key businesses. The Company maintained, however, a valuation allowance on the portion of the deferred tax assets in the U.S. related to certain federal and state tax attributes that are not expected to be realized prior to expiration. In addition, the Company recorded net tax expense to increase other deferred tax asset valuation allowances by $3.6 million.

At March 31, 2025, valuation allowances against deferred tax assets in the U.S. and in certain foreign jurisdictions totaled $42.6 million and $25.0 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.

The tax effects of temporary differences that gave rise to deferred tax assets and liabilities were as follows:

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Unrecognized tax benefits were as follows:

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The Company’s liability for unrecognized tax benefits as of March 31, 2025 was $9.7 million and, if recognized, $7.9 million would have an effective tax rate impact. The Company does not expect a significant change in unrecognized tax benefits during fiscal 2026.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2025, 2024 and 2023, interest and penalties accrued on the consolidated balance sheets and included within income tax expense in the consolidated statements of operations were not significant.

The Company files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. At March 31, 2025, the Company was under income tax examination in several jurisdictions. The Company’s major tax jurisdictions include the United States, Italy, and Canada. For the United States, fiscal 2022 through fiscal 2024 remain subject to examination. For Italy, fiscal 2020 through fiscal 2024 remain subject to examination. For Canada, fiscal 2024 remains subject to examination.

At March 31, 2025, the Company had federal and state tax credits of $47.9 million that, if not utilized against U.S. taxes, will expire between fiscal 2026 and 2049. The Company also had state and local tax loss carryforwards totaling $124.5 million. If not utilized against state apportioned taxable income, certain state and local carryforwards will expire between fiscal 2026 and 2043, while some will not expire due to an unlimited carryforward period. In addition, the Company had tax loss and foreign attribute carryforwards totaling $292.1 million in various tax jurisdictions throughout the world. Certain of the carryforwards in foreign jurisdictions are offset by valuation allowances. If not utilized against taxable income, $80.8 million of these carryforwards will expire between fiscal 2026 and 2034, and $211.3 million, mainly related to Germany and Italy, will not expire due to an unlimited carryforward period.

The Company’s practice and intention is to reinvest, with certain insignificant exceptions, the earnings of its non-U.S. subsidiaries outside of the U.S., and therefore, the Company has not recorded foreign withholding taxes or deferred income taxes for these earnings. The Company has estimated the net amount of unrecognized foreign withholding tax and deferred tax liabilities would total approximately $14.0 million if the accumulated foreign earnings were distributed; however, the actual tax cost would be dependent on circumstances existing when remittance occurs.

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