0001104659-25-103646
SEC filingQ2 revenue grew 12% YoY to $738.9M driven by Climate Solutions, but gross margin fell 290 bps and operating income decreased due to impairment.
For the second quarter of fiscal 2026 (three months ended September 30, 2025), Modine reported net sales of $738.9 million, a 12% increase from $658.0 million in the same period last year. The revenue growth was primarily driven by the Climate Solutions segment, which saw a $88.0 million increase, including $28.1 million from recent acquisitions (L.B. White, Climate by Design, and AbsolutAire). This was partially offset by a $11.2 million decline in Performance Technologies due to market weakness. Foreign currency exchange had a favorable impact of $9.4 million.
Gross profit decreased slightly by $0.7 million to $164.9 million, and gross margin fell 290 basis points to 22.3%. The margin compression was attributed to temporary operating inefficiencies from rapidly expanding data center manufacturing capacity, higher raw material costs ($5.0 million increase), and the absence of prior-year commercial pricing settlements and sales tax credits in Brazil. These factors were partially offset by improved efficiencies in Performance Technologies.
Selling, general and administrative (SG&A) expenses decreased by $1.6 million to $84.2 million, reflecting lower compensation in Performance Technologies and reduced incentive compensation, partly offset by higher costs in Climate Solutions and acquisition-related expenses ($2.3 million increase). Restructuring expenses fell $1.4 million. However, a $4.1 million non-cash impairment charge related to a German facility in Performance Technologies pushed operating income down $1.8 million to $73.5 million (margin 9.9% vs 11.4% prior year). Net income was $44.8 million, down from $46.4 million, as a lower tax provision partially offset the operating decline.
Climate Solutions remained the growth engine, with net sales up 24% to $454.4 million. Data center product sales increased $67.4 million, HVAC technologies rose $17.1 million (including $28.1 million from acquisitions), and heat transfer products grew $3.2 million. However, gross margin in the segment plunged 440 basis points to 24.6% due to operating inefficiencies from the rapid capacity expansion, higher material costs ($4.0 million), and unfavorable currency impacts. SG&A expenses increased $7.3 million to support growth, but amortization decreased $2.2 million as a prior acquisition intangible was fully amortized. Segment operating income fell $2.5 million to $62.2 million (margin 13.7%).
Performance Technologies saw net sales decline 4% to $286.3 million, driven by lower volume in North America due to market weakness and strategic exits from lower-margin business. Higher average selling prices and favorable currency ($4.3 million) provided some offset. Cost of sales decreased $5.2 million, but as a percentage of sales it rose 130 bps to 81.1% due to lower volume and higher material costs. Gross profit dropped $6.0 million to $54.1 million (margin 18.9%). SG&A expenses fell $6.6 million, reflecting restructuring benefits. Despite the $4.1 million impairment, operating income was $29.7 million, down $1.1 million from prior year.
Management's outlook focuses on continued investment in data center capacity, with an incremental $100 million planned over the next twelve months to expand U.S. manufacturing. The pension plan termination is progressing, with expected cash contributions of $20-25 million and non-cash settlement charges of $120-125 million in the second half of fiscal 2026. Acquisitions remain a strategic priority to accelerate growth, as evidenced by the three deals closed in Q2. The company expects to maintain compliance with debt covenants and believes liquidity from operating cash flow, $83.8 million in cash, and $128.8 million in available revolving credit is sufficient for near-term needs. However, temporary operating inefficiencies in Climate Solutions may persist in the short term as the company ramps capacity for data center customers.
Cash and cash equivalents increased to $83.8M at September 30, 2025 from $71.6M at March 31, 2025. Total debt (including short-term debt and current portion of long-term debt) rose to $582.1M from $350.8M, primarily due to borrowings to fund acquisitions. Shareholders' equity grew to $1,061.1M from $918.2M, driven by net earnings of $96.5M and other comprehensive income of $44.1M. Inventory increased significantly to $528.8M from $340.9M, reflecting acquisitions and working capital build. Contract liabilities (deferred revenue) were $30.0M, down from $35.1M.
The Company disclosed information technology purchase commitments totaling approximately $35.0M, primarily for cloud infrastructure, data analytics, and AI-enablement services, expected to be spent from fiscal 2027 through fiscal 2030. Additionally, the Company signed a 7-year operating lease for a manufacturing facility with future lease payments of approximately $44.0M, expected to commence in Q3 FY2026. Environmental remediation accruals totaled $14.1M. The Company also expects to make additional cash contributions of $20.0M to $25.0M to its U.S. pension plan in H2 FY2026 in connection with plan termination.
During the six months ended September 30, 2025, the Company repurchased $5.7M of treasury stock (0.1M shares). No dividends were paid to common shareholders. Net debt increased by $222.4M ($499.6M borrowed, $277.2M repaid), primarily to fund acquisitions. Capital expenditures totaled $59.4M (4.2% of sales), with $46.7M in Climate Solutions and $12.4M in Performance Technologies. The Company executed an amended credit agreement in July 2025, providing a $400.0M revolving credit facility and a $200.0M term loan facility maturing in July 2030.
Climate Solutions segment revenue was $851.8M for H1 FY2026, up 17.7% YoY, driven by Data Centers ($413.2M, +28.5%) and HVAC Technologies ($153.8M, +28.7%). Operating income was $129.1M (15.2% margin). Performance Technologies revenue was $571.8M, down 5.7% YoY, with On-Highway Applications declining to $361.8M from $382.9M. Operating income was $56.2M (9.8% margin). Geographically, Americas revenue grew to $909.8M (from $860.0M), Europe to $402.5M (from $370.0M), and Asia to $111.3M (from $100.2M).
Net earnings of $96.5M were significantly higher than operating cash flow of $29.1M, indicating weak cash conversion. The primary driver was a massive $147.1M inventory build, which consumed cash far in excess of net income. Trade receivables also increased by $48.2M, while accounts payable provided a $96.7M offset. Depreciation and amortization ($38.7M) and deferred taxes ($10.4M) were standard non-cash add-backs.
Capex intensity rose to $59.4M (61.6% of net earnings), up from $40.3M in the prior period. Free cash flow (operating cash flow minus capex) was negative $30.3M, compared to positive $57.5M a year ago. The company also spent $182.1M on acquisitions, further straining liquidity.
Capital returns included $5.7M in share repurchases and $1.8M in dividends to noncontrolling interests, both covered by operating cash flow in the prior year but not in the current period. Financing activities provided $219.5M, largely from net debt borrowings ($222.4M net), to fund the cash shortfall. The net increase in cash was $12.1M, ending at $84.0M.