Stock-Based Compensation

12 Months Ended

Mar. 31, 2023

Note 5: Stock-Based Compensation

The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive plan (“LTIP”) for officers and other executives that consists of stock awards, stock options, and performance-based awards granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Human Capital and Compensation Committee, as applicable, have discretionary authority to set the terms of the stock-based awards. Grants to employees during fiscal 2023 were issued under the Company’s Amended and Restated 2020 Incentive Compensation Plan. In lieu of performance-based stock awards, the Company granted performance cash awards to the LTIP participants in fiscal 2023, 2022, and 2021. At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2023, approximately 2.2 million shares authorized under the Amended and Restated 2020 Incentive Compensation Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $6.6 million, $5.7 million, and $6.3 million in fiscal 2023, 2022, and 2021, respectively.

Stock Options

The Company recorded $1.2 million, $1.1 million, and $0.9 million of compensation expense related to stock options in fiscal 2023, 2022, and 2021, respectively. The grant date fair value of stock options that vested during fiscal 2023, 2022, and 2021, was $1.0 million, $0.9 million, and $1.3 million, respectively. As of March 31, 2023, the total compensation expense not yet recognized related to non-vested stock options was $2.3 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.1 years.

The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:

	Years ended March 31,
	2023			2022			2021
Fair value of options	$	6.99		$	8.79		$	3.46
Expected life of awards in years		6.0			6.1			6.1
Risk-free interest rate		3.0	%		1.1	%		0.4	%
Expected volatility of the Company’s stock		57.8	%		56.5	%		54.1	%
Expected dividend yield on the Company’s stock		0.0	%		0.0	%		0.0	%

Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based upon changes in the Company’s historical common stock prices over the same time period as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based upon historical patterns and the terms of the options. Based upon the terms of the fiscal 2023 annual awards, stock options vest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Stock option grants preceding the fiscal 2023 grant vest 25 percent per year for four years.

A summary of stock option activity for fiscal 2023 was as follows:

	Shares			Weighted-average exercise price		Weighted-average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, beginning of year		1.0		$	12.12
Granted		0.2			12.40
Exercised		(0.2	)		11.77
Forfeited or expired		(0.1	)		12.26
Outstanding, end of year		0.9		$	12.28		7.1	$	9.6

Exercisable, March 31, 2023		0.4		$	12.46		5.5	$	4.3

The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 2023 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the price of Modine’s common shares.

Additional information related to stock options exercised is as follows:

	Years ended March 31,
	2023		2022		2021
Intrinsic value of stock options exercised	$	1.5	$	0.1	$	1.4
Proceeds from stock options exercised		2.9		1.4		4.1

Restricted Stock

The Company recorded $5.4 million, $5.0 million, and $4.3 million of compensation expense related to restricted stock in fiscal 2023, 2022, and 2021, respectively. The grant date fair value of restricted stock awards that vested during fiscal 2023, 2022, and 2021 was $4.7 million, $4.4 million, and $4.5 million, respectively. At March 31, 2023, the Company had $6.4 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 1.8 years. The Company values restricted stock awards using the closing market price of its common shares on the date of grant. Based upon the terms of the fiscal 2023 annual awards, restricted stock awards vest 33 percent, 33 percent, and 34 percent per year for three years, respectively. Restricted stock award grants preceding the fiscal 2023 grant vest 25 percent per year for four years. Restricted stock awards granted to non-employee directors in fiscal 2023 vest one year from the time of grant.

A summary of restricted stock activity for fiscal 2023 was as follows:

	Shares			Weighted-average price
Non-vested balance, beginning of year		0.7		$	11.61
Granted		0.5			13.60
Vested		(0.3	)		11.85
Forfeited		(0.1	)		10.58
Non-vested balance, end of year		0.8		$	12.95

Restricted Stock – Performance-Based Shares

The Company granted performance-based cash awards in fiscal 2023, 2022, and 2021 in lieu of performance-based stock awards. For performance-based stock awards, the Company values the awards using the closing market price of its common shares on the date of grant. During fiscal 2023 all performance-based awards were cash-based, therefore, the Company did not recognize compensation expense related to performance-based stock awards. In fiscal 2022, the Company recorded a $0.4 million benefit related to the performance-based stock awards granted in fiscal 2020. The payout earned for the fiscal 2020 awards was less than previously estimated. In fiscal 2021, the Company recorded $1.1 million of compensation expense related to performance-based stock awards.

The payouts earned under the performance portion of the award program are based upon the attainment of certain financial targets over a three-year period and are paid after the end of that three-year performance period, if the performance targets have been achieved. The performance metrics for the performance-based cash awards granted in fiscal 2021 are based upon both a target three-year average consolidated cash flow return on invested capital and a target three-year average annual revenue growth at the end of the three-year performance period, commencing with the fiscal year of grant. The performance metrics for the performance-based cash awards granted in fiscal 2022 and fiscal 2023 are based upon both a target three-year average consolidated cash flow return on invested capital and a target three-year average growth in consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”) at the end of the three-year performance period, commencing with the fiscal year of grant.