MOD MODINE MANUFACTURING CO 10-Q 2026-09-30 section summaries

Modine Manufacturing — Q2 and H1 FY2027

Dollars in millions except per-share amounts. Q2 and H1 ended September 30, 2026; comparisons are with the corresponding FY2026 periods.

Consolidated results

Q2 sales grew 34.6%, led by Data Centers, while operating income increased 33.1%. Despite higher operating income, Q2 earnings attributable to Modine fell as the effective tax rate rose to 65.6% from 29.7%. Q2 tax expense included $29.5 related to legal-entity restructuring for the Gentherm transaction and changes in earnings mix. H1’s effective tax rate was 33.2%, versus 25.4%; H1 earnings also benefited from $26.5 of tax benefits on stock awards, partly offset by higher nondeductible-compensation tax detriments.

Q2 segment results

Segment sales include intersegment sales; corporate and eliminations reconcile segment totals to consolidated results.

Data Centers’ Q2 sales rose 95.4%; Commercial HVAC grew 22.6%, while Performance Technologies was nearly flat. Corporate costs included $14.1 of Q2 costs related to the proposed Gentherm transaction. The April 1, 2026 reorganization split the former Climate Solutions segment into Data Centers and Commercial HVAC, with prior periods recast.

Cash flow and investment

Cash use from operations reflected substantial working-capital outflows: inventory use was $194.5, versus $147.1, and receivables use was $68.4, versus $48.2; accounts payable provided $111.9, versus $96.7. Data Centers capital expenditures were $28.8 versus $21.3 in Q2 and $59.7 versus $28.4 in H1, supporting capacity expansion. Total company Q2 capital expenditures were $42.1 versus $31.9.

Balance sheet, debt and shares

Gross debt was $722.8, versus $430.6 at March 31; reported long-term debt, net of current portion and issuance costs, was $677.4 versus $384.9. Balance-sheet total debt including short-term debt and current portion was $724.3 versus $436.3. Revolver borrowings rose to $460.0 from $150.0; remaining capacity was $84.2 after domestic letters of credit. The company was covenant-compliant; limits included maximum leverage of 3.5x Adjusted EBITDA and minimum interest coverage of 3.0x. FY2031 scheduled gross maturities were concentrated at $615.1.

Issued shares increased from 57.0 million at March 31 to 57.6 million at September 30; treasury shares rose from 4.2 million to 4.4 million, implying outstanding shares of 52.8 million and 53.2 million, respectively.

Strategy, transaction and other notable items

On October 1, 2026, Modine completed the spin-off and combination of Performance Technologies with Gentherm in a Reverse Morris Trust transaction. Modine retained Data Centers and Commercial HVAC; its shareholders received approximately 44% of Gentherm. Modine received $156.0 in a cash distribution and a further $42.6 cash transfer, subject to post-closing adjustment; SpinCo raised $250.0 of third-party debt. Modine expects to report Performance Technologies as a discontinued operation beginning in Q3 FY2027. The transaction is generally tax-free for U.S. federal income tax purposes and is not expected to generate an income-statement gain or loss. Modine subsequently used $198.6 of spin-off-related cash proceeds to repay revolving-credit borrowings.

A strategic data-center customer’s $165.0 upfront deposit under a long-term capacity agreement supports planned investment. Contract liabilities were $209.4 at September 30 ($43.0 current; $166.4 noncurrent), versus $194.5 at March 31. Stock-based compensation expense was $4.7 in Q2 and $12.7 in H1, versus $2.1 and $7.4; $42.0 of unrecognized compensation was expected to be recognized over a weighted-average two years. Warranty accruals ended at $11.3 versus $7.8 a year earlier, with higher adjustments to prior-period warranties and settlements. H1 foreign-currency translation loss was $14.9, compared with translation income of $41.3 in H1 FY2026.

Modine (MOD) — Q2 and first six months of FY2027

Period ended September 30, 2026; dollars in millions unless stated otherwise.

Consolidated results

Sales grew 35% in Q2 and 31% for the first six months, while cost of sales grew faster, reducing gross margin to 20.7% in both periods—down 160 basis points in Q2 and 250 basis points year to date. Higher materials, including components, raw materials, and tariffs, added approximately $40.0 million to Q2 cost of sales and $61.0 million for the first six months. Higher selling prices partly offset the pressure. Data Centers also faced supplier constraints and production inefficiencies during capacity expansion. Operating income benefited in part from the absence of a $4.1 million prior-year impairment charge. Net earnings declined in Q2 despite higher operating income, principally because of the higher tax provision.

Q2 SG&A included $14.1 million of transaction-related costs and approximately $6.0 million of higher compensation; first-half SG&A included $21.2 million of transaction costs and approximately $15.0 million of higher compensation. Q2 tax expense included $29.5 million related to spin-off legal-entity restructuring. First-half tax expense also reflected $26.5 million of Q1 tax benefits from stock-based compensation awards; Modine expects higher nondeductible-compensation tax detriments in the rest of FY2027 to largely offset those benefits.

Segment performance

Data Centers: Q2 revenue nearly doubled, primarily on North American hyperscale demand. Yet gross margin declined to 19.7% from 24.4%, as rapid capacity expansion, higher materials, and constraints on key suppliers disrupted production schedules and worsened overhead, facility, and labor absorption. Materials added approximately $27.0 million to Q2 segment costs. Operating income still increased as sales growth more than offset margin pressure. For the first six months, revenue was $788.3 million versus $408.7 million and operating income was $107.5 million versus $70.6 million; gross margin was 19.9% versus 26.8%.

Commercial HVAC: Q2 sales growth reflected higher volume and average selling prices, led by heat-transfer solutions and HVAC technologies. Heat-transfer sales rose $23.6 million, including data-center heat-exchanger coils; HVAC technologies rose $15.7 million, led by heating products. Gross margin declined 140 basis points to 23.1% as materials, mix, and labor/inflation costs outweighed some pricing benefits; raw materials added approximately $8.0 million to Q2 cost of sales. For the first six months, revenue was $547.1 million versus $447.1 million and operating income was $65.7 million versus $58.5 million. Acquisitions contributed $19.7 million of first-half sales; higher materials, labor/inflation, product-transfer inefficiencies, and mix pressured gross margin.

Performance Technologies: Q2 revenue was nearly flat as higher pricing was offset by lower volume, including strategic exits of lower-margin business; heavy-duty equipment sales rose $11.3 million while on-highway sales fell $8.4 million. Operating income increased partly because the prior-year quarter included a $4.1 million noncash facility impairment. First-half revenue was $565.5 million versus $571.8 million and operating income was $59.7 million versus $56.2 million. North American market weakness and lower-margin business exits weighed on sales; the prior-year impairment and lower SG&A and restructuring costs supported operating income.

Cash flow, investment, and liquidity

The $86.2 million deterioration in operating cash flow primarily reflected working-capital investment—especially inventory and receivables supporting Data Centers growth—and higher tax payments, partly offset by higher payables. Capital spending increased chiefly to expand Data Centers capacity. At September 30, 2026, cash and equivalents were $150.6 million, including $94.0 million held by non-U.S. subsidiaries, and revolver availability was $84.2 million. Net borrowings on credit facilities increased $287.6 million during the first six months.

Modine reported compliance with its credit covenants and expected to remain compliant. The agreement limits leverage to 3.5x Adjusted EBITDA and requires Adjusted EBITDA to interest expense of at least 3.0x. Debt is secured by substantially all domestic assets other than real estate, and covenants restrict additional debt, liens, investments, certain transactions, and restricted payments.

The company acquired 224,528 shares for tax withholding on vested awards for $65.7 million in the first half, $60.0 million more than a year earlier. This increase reflected fiscal 2024 performance awards issued after their three-year performance period as the share price rose from $27.29 at grant to $295.88 at issuance. No shares were repurchased under the repurchase program; $81.6 million of authorization remained.

Spin-off and strategic direction

On October 1, 2026, Modine completed the Performance Technologies spin-off and its combination with Gentherm in a Reverse Morris Trust. Modine shareholders received Gentherm shares representing approximately 44% of Gentherm after the transaction. SpinCo borrowed $250.0 million of third-party debt to fund cash payments; Modine received $156.0 million before closing and a $42.6 million cash transfer subject to post-closing adjustment, and used the $198.6 million received to repay revolver borrowings. Modine expects to derecognize SpinCo’s net assets against equity, without a gain or loss in earnings, and to report Performance Technologies as discontinued operations beginning in Q3 FY2027. The transaction was generally structured to be tax-free for U.S. federal income-tax purposes.

Disposition costs totaled $36.2 million through September 30, with another $20.0–$25.0 million expected in the second half of FY2027. Modine retained Data Centers and Commercial HVAC, positioning the company as a climate-solutions business, and announced a proposed name change to Modexus Solutions, Inc., subject to approvals. Following an April 2026 segment reorganization, the company had separated its former Climate Solutions segment into Data Centers and Commercial HVAC to pursue growth and improve margins and cash flow.

Principal risks and dependencies

Modine’s growth opportunity in data-center cooling comes with execution and funding demands: supplier capacity, production ramp-up, working capital, and the ability to earn adequate returns on expansion. Demand may be affected by technology adoption, large-customer and project concentration, permitting, electricity availability, construction labor, supply-chain limits, or local and governmental opposition to data centers, including concerns about AI. Other risks include materials and tariff inflation, labor and logistics disruption, customer pricing pressure and inability to pass through costs, product or manufacturing problems, and delays in customer or construction projects. The spin-off also leaves Modine less diversified and more exposed to HVAC/R and data-center markets. Further exposures include acquisition and restructuring execution, environmental remediation, cybersecurity, regulatory and compliance costs, foreign exchange, variable-rate interest expense, tax-law changes, liquidity needs, and compliance with credit covenants.

Market-risk disclosures are incorporated by reference from Part II, Item 7A of MOD’s FY2026 Form 10-K for the year ended March 31, 2026. MOD reported no material changes in its market risks since that filing.

Disclosure Controls and Internal Control

As of September 30, 2026, management concluded with reasonable assurance that the company’s disclosure controls and procedures were effective. During Q2 FY2027, no changes to internal control over financial reporting materially affected, or were reasonably likely to materially affect, those controls. This section reports no financial metrics or other material business developments.

During the three months ended September 30, 2026, no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement. This section reports no financial results or other business developments.